Gatton v. T-Mobile USA, Inc.

152 Cal. App. 4th 571

• Court: California Court of Appeal
• Decided: June 22, 2007
• Docket: Nos. A112082, A112084
• Status: Published

Opinions

Opinion

GEMELLO, J.

In this consolidated appeal, T-Mobile USA, Inc., appeals from an order denying its motion to compel arbitration of actions challenging the early termination fee charged to cellular telephone service subscribers and challenging the practice of selling locked handsets that a subscriber cannot use when switching carriers. T-Mobile contends the court erred in concluding that the arbitration clause in its service agreement is unconscionable.

In the published portion of this opinion, we hold that the adhesive nature of the service agreement established a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives and that the high degree of substantive unconscionability arising from the class action waiver rendered the arbitration provision unenforceable.

In the unpublished portion of this opinion, we reject T-Mobile’s contention that the Federal Arbitration Act preempts any rule that class action waivers are unconscionable under California law.

We affirm the trial court order.

Factual and Procedural Background The Parties and the Service Agreements

T-Mobile USA, Inc. (T-Mobile), is a cellular telephone provider in California. Plaintiffs are or were subscribers to T-Mobile.¹

All plaintiffs executed service agreements drafted by T-Mobile. Each agreement incorporated terms and conditions drafted by T-Mobile.² Directly above the signature line in the service agreement executed by plaintiffs is a short paragraph stating, “By signing below, you acknowledge you . . . have received a copy of this Agreement. . . . You also acknowledge you have received and reviewed the T-Mobile Terms and Conditions, and agree to be bound by them. . . . All disputes are subject to mandatory arbitration in accordance with paragraph 3 of the Terms and Conditions.”

The introductory paragraph to the terms and conditions incorporated into the agreement states: “Welcome to T-Mobile. BY ACTIVATING OR USING OUR SERVICE YOU AGREE TO BE BOUND BY THE AGREEMENT. Please carefully read these Terms and Conditions (‘T&C’s’) as they describe your Service and affect your legal rights. IF YOU DON’T AGREE WITH THESE T&C’S, DO NOT USE THIS SERVICE OR YOUR UNIT.” Similarly, the handset shipping box was sealed across the closing seam with a sticker that stated: “IMPORTANT H] Read the enclosed T-Mobile Terms & Conditions. By using T-Mobile service, you agree to be bound by the Terms & Conditions, including the mandatory arbitration and early termination fee provisions.” The terms and conditions were also included in a “Welcome Guide” enclosed in the boxes containing the handsets.

Section 3 of the terms and conditions incorporated into the agreement is entitled “Mandatory Arbitration; Dispute Resolution.” It includes language waiving any right to seek classwide relief.³ The terms and conditions incorporated into each of the plaintiff’s agreements included a mandatory arbitration clause including a class action waiver.

Early Termination Fees Case (No. A112082)

The action of plaintiffs Bruce Gatton, Jeweldean Hull, Christina Nguyen, and Conor Vaughn, brought on behalf of themselves individually and on behalf of all similarly situated California residents, challenges the fee imposed by T-Mobile for termination of the service agreement before its expiration date.

The complaint includes the following allegations. The service agreement between T-Mobile and its subscribers is typically one or two years in duration. Under the terms of the agreement, subscribers who terminate the service before the expiration of the agreement are subject to an early termination penalty of approximately $200 per telephone. The early termination penalties are also imposed if T-Mobile terminates the agreement for, among other reasons, nonpayment by the subscriber. The amount of the fee does not vary according to how long the contract has been in effect at the time of termination; it is the same whether the contract has been in effect for several weeks or several months. The flat-fee early termination penalty constitutes an unlawful penalty under Civil Code section 1671, subdivision (d),⁴ is unlawful under the unfair competition law (Bus. & Prof. Code, § 17200 et seq.), and is unconscionable under the Consumers Legal Remedies Act (CLRA) (Civ. Code, § 1750 et seq.).

Plaintiffs seek a permanent injunction prohibiting T-Mobile from collecting or enforcing the early termination penalty; a constructive trust on all monies collected as early termination penalties; and all other relief to which they are statutorily entitled, including restitution.

Handset Locking Case (No. A112084)

The action of plaintiffs Nguyen and Grant, brought on behalf of themselves individually and on behalf of all similarly situated California residents, challenges the practice of installing a locking device in T-Mobile handsets that prevents its subscribers from switching cell phone providers without purchasing a new handset.

The complaint includes the following allegations. The handsets T-Mobile sells its subscribers are manufactured by equipment vendors such as Nokia, Motorola, or Samsung. Each handset has a receptacle into which a machine-readable SIM (subscriber information module) card can be inserted. The card is approximately the size of a postage stamp and contains the subscriber and the provider identifying information. The SIM card can be inserted and removed by hand; no special tools or equipment are required. T-Mobile employs a SIM lock to prevent its handsets from operating with a SIM card programmed for any other network. The SIM lock can be unlocked by entering an eight-digit code number; once unlocked, the handset will operate with any compatible SIM card for any network. T-Mobile requires equipment vendors to alter the handsets they sell to T-Mobile by locking them with SIM locks and setting the SIM unlock code based on a secret algorithm provided by T-Mobile. The agreement between T-Mobile and its subscribers falsely states that T-Mobile handsets are not compatible with and will not work with other wireless networks. That misrepresentation constitutes unfair competition and violates the CLRA. The secret locking makes it impossible or impracticable for subscribers to switch cell phone service providers without purchasing a new handset.

Plaintiffs seek an order directing T-Mobile to disclose the existence and effect of the handset locks and to offer to unlock the handsets free of charge; an injunction prohibiting T-Mobile from secretly programming and selling handsets with SIM locks and from representing that the handsets are not compatible with services provided by other wireless carriers; and for restitution and/or disgorgement of all amounts wrongfully charged to plaintiffs and members of the class.

Motion to Compel Arbitration

T-Mobile moved to compel arbitration of the two actions in accord with the service agreement. Plaintiffs opposed the motion on the grounds that (1) their claims for injunctive relief under the unfair competition law and the CLRA were not arbitrable, and (2) their remaining claims were not arbitrable because the arbitration clause was unconscionable.

The trial court denied the motion to compel. It concluded that the claims for injunctive relief were primarily for the benefit of the public and, consequently, were not subject to arbitration. As to the other claims, it concluded that the arbitration provision was unconscionable and therefore unenforceable. The trial court held that although the indications of procedural unconscionability were “not particularly strong,” under Discover Bank v. Superior Court (2005) 36 Cal.4th 148 [30 Cal.Rptr.3d 76, 113 P.3d 1100] (Discover Bank), the arbitration clause was substantively unconscionable because its prohibition on class arbitrations or participation in a class action was against public policy.

Discussion

Appellant T-Mobile contends the trial court erred in denying its motion to compel because the class action waiver did not render the arbitration provision unconscionable and because principles of federal preemption require enforcement of the provision.

I. Unconscionability

An agreement to arbitrate is valid except when grounds exist for revocation of a contract. (Code Civ. Proc., §§ 1281, 1281.2, subd. (b).) Unconscionability is one ground on which a court may refuse to enforce a contract. (Civ. Code, § 1670.5.) The petitioner, T-Mobile here, bears the burden of proving the existence of a valid arbitration agreement and the opposing party, plaintiffs here, bears the burden of proving any fact necessary to its defense. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 972 [64 Cal.Rptr.2d 843, 938 P.2d 903].)

Whether a provision is unconscionable is a question of law. (Civ. Code, § 1670.5, subd. (a); Flores v. Transamerica HomeFirst, Inc. (2001) 93 Cal.App.4th 846, 851 [113 Cal.Rptr.2d 376] (Flores).) On appeal, when the extrinsic evidence is undisputed, as it is here, we review the contract de novo to determine unconscionability. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1527 [60 Cal.Rptr.2d 138] (Stirlen); Flores, atp. 851.)

The analytic framework employed by the California Supreme Court in determining whether a contract provision is unconscionable has its origins in A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473 [186 Cal.Rptr. 114] (A & M Produce). (See Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 114 [99 Cal.Rptr.2d 745, 6 P.3d 669] (Armendariz).) Unconscionability has a procedural and a substantive element; the procedural element focuses on the existence of oppression or surprise and the substantive element focuses on overly harsh or one-sided results. (Armendariz, at p. 114, quoting A & M Produce, at pp. 486-487; see also Discover Bank, supra, 36 Cal.4th at p. 160.) To be unenforceable, a contract must be both procedurally and substantively unconscionable, but the elements need not be present in the same degree. (Armendariz, at p. 114.) The analysis employs a sliding scale: “the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.-, see also Donovan v. RRL Corp. (2001) 26 Cal.4th 261, 291 [109 Cal.Rptr.2d 807, 27 P.3d 702].)

A. The Discover Bank Decision

Our analysis of the challenged arbitration provision is governed by the California Supreme Court decision Discover Bank. There, the court considered an unconscionability challenge to an arbitration provision prohibiting classwide arbitration in an agreement between a credit card company and its cardholders. (Discover Bank, supra, 36 Cal.4th at p. 152.) The provision was added to the agreement by a notice sent to cardholders. (Id. at p. 153.)

The court emphasized the “important role of class action remedies in California law.” (Discover Bank, supra, 36 Cal.4th at p. 157.) “ ‘Frequently numerous consumers are exposed to the same dubious practice by the same seller so that proof of the prevalence of the practice as to one consumer would provide proof for all. Individual actions by each of the defrauded consumers is often impracticable because the amount of individual recovery would be insufficient to justify bringing a separate action; thus an unscrupulous seller retains the benefits of its wrongful conduct. A class action by consumers produces several salutary by-products, including a therapeutic effect upon those sellers who indulge in fraudulent practices, aid to legitimate business enterprises by curtailing illegitimate competition, and avoidance to the judicial process of the burden of multiple litigation involving identical claims. The benefit to the parties and the courts would, in many circumstances, be substantial.’ ” (Id. at p. 156, quoting Vasquez v. Superior Court (1971) 4 Cal.3d 800, 808 [94 Cal.Rptr. 796, 484 P.2d 964].)

In analyzing the unconscionability issue, Discover Bank first concluded that “when a consumer is given an amendment to its cardholder agreement in the form of a ‘bill staffer’ that he would be deemed to accept if he did not close his account, an element of procedural unconscionability is present.” (Discover Bank, supra, 36 Cal.4th at p. 160.) Turning to the substantive element, the court stated “although adhesive contracts are generally enforced [citation], class action waivers found in such contracts may also be substantively unconscionable inasmuch as they may operate effectively as exculpatory contract 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.’ (Italics added.)” (Discover Bank, at pp. 160-161.) The court acknowledged that class action and class arbitration waivers are not, in the abstract, exculpatory clauses, but because damages in consumer cases are often small and “because ‘ “[a] company which wrongfully exacts a dollar from each of millions of customers will reap a handsome profit” ’ [citation], ‘ “the class action is often the only effective way to halt and redress such exploitation.” ’ ” (Ibid.) Moreover, the court recognized that such class action and class arbitration waivers are “indisputably one-sided.” (Ibid.) “ ‘Although styled as a mutual prohibition on representative or class actions, it is difficult to envision the circumstances under which the provision might negatively impact Discover [Bank], because credit card companies typically do not sue their customers in class action lawsuits.’ ” (Ibid.)

In light of those considerations, Discover Bank held that when a waiver of classwide relief “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.’ (Civ. Code, § 1668.) 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.)

Against this legal backdrop, we consider the specific provision challenged here.

B. Procedural Unconscionability

The procedural element of the unconscionability analysis concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. (Kinney v. United Healthcare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329 [83 Cal.Rptr.2d 348], citing A & M Produce, supra, 135 Cal.App.3d at p. 486.) The element focuses on oppression or surprise. {Armendariz, supra, 24 Cal.4th at p. 114.) “Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.” {Flores, supra, 93 Cal.App.4th at p. 853, citing A & M Produce, at p. 486.)⁵ Surprise is defined as “ ‘the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms.’ ” {Stirlen, supra, 51 Cal.App.4th at p. 1532, quoting A & M Produce, at p. 486.)

In their reply brief, plaintiffs did not dispute T-Mobile’s assertion that the surprise aspect of procedural unconscionability is absent because the arbitration provision was fully disclosed to T-Mobile’s customers. In response to our request for supplemental briefing, plaintiffs first urged that surprise is not necessary to find procedural unconscionability. Plaintiffs then asserted that we could find surprise because T-Mobile did not specifically bring to the attention of its customers that the arbitration provision included a class action waiver and because the print used in the agreement was small. We conclude that plaintiffs have not shown surprise. The arbitration provision was not disguised or hidden, and T-Mobile made affirmative efforts to bring the provision to the attention of its customers, including by referencing the provision on a sticker placed across the closing seam of the handset shipping box. (Stirlen, supra, 51 Cal.App.4th at p. 1532.) A finding of procedural unconscionability in this case cannot be based on the existence of surprise.

The California Supreme Court has consistently reiterated that “ ‘[t]he procedural element of an unconscionable contract generally takes the form of a contract of adhesion.’ ” (Discover Bank, supra, 36 Cal.4th at p. 160; see also Armendariz, supra, 24 Cal.4th at p. 113 [“Unconscionability analysis begins with an inquiry into whether the contract is one of adhesion”]; Little v. Auto Stiegler, Inc. (2003) 29 Cal.4th 1064, 1071 [130 Cal.Rptr.2d 892, 63 P.3d 979].) Appellate courts considering unconscionability challenges in consumer cases have routinely found the procedural element satisfied where the agreement containing the challenged provision was a contract of adhesion. For example, in Flores we stated that “[a] finding of a contract of adhesion is essentially a finding of procedural unconscionability” (Flores, supra, 93 Cal.App.4th at p. 853), and in Aral v. Earthlink, Inc. (2005) 134 Cal.App.4th 544, 557 [36 Cal.Rptr.3d 229], the court described an adhesive contract as “quintessential procedural unconscionability.” (See also Marin Storage & Trucking, Inc. v. Benco Contracting & Engineering, Inc. (2001) 89 Cal.App.4th 1042, 1054 [107 Cal.Rptr.2d 645] (Marin Storage); Cohen v. DIRECTV, Inc. (2006) 142 Cal.App.4th 1442, 1451 [48 Cal.Rptr.3d 813].)

Whether the challenged provision is within a contract of adhesion pertains to the oppression aspect of procedural unconscionability. A contract of adhesion is “ 1 “ ‘imposed and drafted by the party of superior bargaining strength’ ” ’ ” and “ ‘ “ ‘relegates to the subscribing party only the opportunity to adhere to the contract or reject it.’ ” ’ ” (Discover Bank, supra, 36 Cal.4th at p. 160.) This definition closely parallels the description of the oppression aspect of procedural unconscionability, which “arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice.” (Flores, supra, 93 Cal.App.4th at p. 853, citing A & M Produce, supra, 135 Cal.App.3d at p. 486; see also Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 925, fn. 9 [216 Cal.Rptr. 345, 702 P.2d 503] [noting that oppression arises from “unequal bargaining power”].) It is clear that the T-Mobile service agreement was a contract of adhesion: T-Mobile drafted the form agreement, its bargaining strength was far greater than that of individual customers, and customers were required to accept all terms and conditions of the agreement as presented or forgo T-Mobile’s telephone service.

Nevertheless, T-Mobile argues that there was no oppression in the formation of the agreements because plaintiffs had the option of obtaining mobile phone service from one of two other providers whose agreements did not contain class action waivers. Preliminarily, we note that the evidence of the availability of market alternatives is exceedingly slim.⁶ More fundamentally, we reject the contention that the existence of market choice altogether negates the oppression aspect of procedural unconscionability. “Procedural unconscionability focuses on the manner in which the disputed clause is presented to the party in the weaker bargaining position. When the weaker party is presented the clause and told to ‘take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present.” (Szetela v. Discover Bank (2002) 97 Cal.App.4th 1094, 1100 [118 Cal.Rptr.2d 862] (Szetela).) The existence of consumer choice decreases the extent of procedural unconscionability but does not negate the oppression and obligate courts to enforce the challenged provision regardless of the extent of substantive unfairness. The existence of consumer choice is relevant, but it is not determinative of the entire issue. (Ibid.)

7

We considered market alternatives as a relevant factor in our decision in Marin Storage, supra, 89 Cal.App.4th 1042. There, a general contractor challenged the enforceability of an indemnification provision in a form subcontract created by a crane rental company. (Id. at pp. 1046-1048.) The procedural element was satisfied because the agreement at issue was “a contract of adhesion and, hence, procedurally unconscionable.” (Id. at p. 1054.) But the degree of procedural unconscionability was limited because the contractor was sophisticated and had choice in selecting crane providers; in fact the plaintiff had done business with 10 other firms. (Id. at p. 1056.) We also considered substantive unconscionability and concluded that, viewed in its commercial context, the indemnification provision was not overly one-sided or unreasonable. (Id. at pp. 1055-1056.) Balancing the procedural and substantive elements, we concluded that “[i]n light of the low level of procedural unfairness ... a greater degree of substantive unfairness than has been shown here was required before the contract could be found substantively unconscionable.” (Id. at p. 1056; see also Woodside Homes of Cal., Inc. v. Superior Court (2003) 107 Cal.App.4th 723, 730 [132 Cal.Rptr.2d 35] [because plaintiff home buyers were not unsophisticated or lacking in choice, they established only a “low level” of procedural unconscionability and were obligated to establish “a high level of substantive unconscionability”].)

The Marin Storage approach is consistent with the instruction in Armendariz, supra, 24 Cal.4th at page 114, that the elements of procedural and substantive unconscionability “need not be present in the same degree.” The court explained: “ ‘Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.’ [Citations.] In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Ibid.)

In the three appellate decisions relied on by T-Mobile to support its approach to procedural unconscionability, the results would be the same under the Marin Storage reasoning. In two, the courts, like Marin Storage, actually rejected the unconscionability claims only after finding no clear substantive unfairness. (Morris v. Redwood Empire Bancorp, supra, 128 Cal.App.4th at p. 1322 [“In sum, we are able to discern little or no procedural unconscionability from the allegations of the second amended complaint. [1] We now turn our analysis to substantive unconscionability”]; Wayne v. Staples, Inc., supra, 135 Cal.App.4th at p. 483.) Critically, any substantive unconscionability was relatively minor: Morris involved only a $150 fee charged upon termination of a credit card merchant account (Morris, at pp. 1323-1324); Staples involved allegedly excessive charges for “declared value coverage” but the charges were “comparable to the amount charged by other retailers of shipping services” (Staples, at p. 483). In the third, Dean Witter Reynolds, Inc. v. Superior Court (1989) 211 Cal.App.3d 758, 772 [259 Cal.Rptr. 789] (Dean Witter), while the court did not reach the issue of substantive unconscionability, the challenged provision was a relatively insignificant $50 fee for terminating an individual retirement account.

The cases are distinguishable because in each there was not a high degree of substantive unconscionability that could justify a court “ ‘disregarding] the regularity of the procedural process of the contract formation.’ ” (Armendariz, supra, 24 Cal.4th at p. 114.) In other words, because any substantive unconscionability was low, the sliding scale analysis did not provide a basis to refuse to enforce the provisions in light of the minimal procedural unconscionability.

The rule T-Mobile asks us to adopt disregards the sliding scale balancing required by Armendariz', in the absence of evidence of surprise, the proposed rule would allow any evidence of consumer choice to trump all other considerations, mandating courts to enforce the challenged provisions without considering the degree of substantive unfairness and the potential harm to important public policies. Although contracts of adhesion are well accepted in the law and routinely enforced, the inherent inequality of bargaining power supports an approach to unconscionability that preserves the role of the courts in reviewing the substantive fairness of challenged provisions. (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 817-818; Marin Storage, supra, 89 Cal.App.4th at p. 1052.) Otherwise, the imbalance of power creates an opportunity for overreaching in drafting form agreements. (See Graham v. Scissor-Tail, Inc., at pp. 817-818.) The possibility of overreaching is even greater in ordinary consumer transactions involving relatively inexpensive goods or services because consumers have little incentive to carefully scrutinize the contract terms or to research whether there are adequate alternatives with different terms, and companies have every business incentive to craft the terms carefully and to their advantage. The unconscionability doctrine ensures that companies are not permitted to exploit this dynamic by imposing overly one-sided and onerous terms. {Ibid.) In sum, there are provisions so unfair or contrary to public policy that the law will not allow them to be imposed in a contract of adhesion, even if theoretically the consumer had an opportunity to discover and use an alternate provider for the good or service involved.

We reject the rule proposed by T-Mobile. Instead we hold that absent unusual circumstances,⁸ use of a contract of adhesion establishes a minimal degree of procedural unconscionability notwithstanding the availability of market alternatives. If the challenged provision does not have a high degree of substantive unconscionability, it should be enforced. But, under Armendariz, supra, 24 Cal.4th at page 114, we conclude that courts are not obligated to enforce highly unfair provisions that undermine important public policies simply because there is some degree of consumer choice in the market.

The Ninth Circuit, sitting en banc in Nagrampa v. MailCoups, Inc. (9th Cir. 2006) 469 F.3d 1257, reached the same conclusion. There, a franchisee contended that an arbitration provision in a contract of adhesion was unconscionable. (Id. at p. 1281.) The court rejected the franchisor’s argument that the availability of other franchising opportunities could alone defeat the plaintiffs claim of procedural unconscionability. (Id. at p. 1283.) Because the franchisor had overwhelming bargaining power, drafted the contract, and presented it on a take-it-or-leave-it basis, there was “minimal” evidence of procedural unconscionability. (Id. at p. 1284.) The court reasoned that the minimal showing was “sufficient to require us, under California law, to reach the second prong of the unconscionability analysis. We therefore next examine the extent of substantive unconscionability to determine, whether based on the California courts’ sliding scale approach, the arbitration provision is unconscionable.” (Ibid.)

We conclude that plaintiffs showed a minimal degree of procedural unconscionability arising from the adhesive nature of the agreement. But this is “ ‘the beginning and not the end of the analysis insofar as enforceability of its terms is concerned.’ ” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at p. 819.)⁹ Under the sliding scale approach, plaintiffs were obligated to make a strong showing of substantive unconscionability to render the arbitration provision unenforceable.

C. Substantive Unconscionability

The substantive element of the unconscionability analysis focuses on overly harsh or one-sided results. (Armendariz, supra, 24 Cal.4th at p. 114; Flores, supra, 93 Cal.App.4th at p. 853.) In light of Discover Bank, we conclude that the challenged provision has a high degree of substantive unconscionability.

In considering whether class action waivers may be unconscionable, Discover Bank emphasized that class actions are often the only effective way to halt corporate wrongdoing and that class action waivers are “indisputably one-sided” because companies typically do not sue their customers in class action lawsuits. (Discover Bank, supra, 36 Cal.4th at p. 161.) The court did not conclude that all class action waivers are necessarily unconscionable, but the court did hold that “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 the waiver is exculpatory in effect and unconscionable under California law. {Discover Bank, supra, 36 Cal.4th at pp. 162-163; see also Cohen v. DIRECTV, Inc., supra, 142 Cal.App.4th at pp. 1451-1454; Klussman v. Cross Country Bank (2005) 134 Cal.App.4th 1283, 1297-1298 [36 Cal.Rptr.3d 728]; Aral v. Earthlink, Inc., supra, 134 Cal.App.4th at pp. 555-557; Szetela, supra, 97 Cal.App.4th at pp. 1100-1102 [cited with approval in Discover Bank].)

T-Mobile contends that this case is distinguishable from Discover Bank on two grounds. First, the amount in controversy exceeds the $29 late payment fee involved in Discover Bank. The largest monetary damage claim is the $200 early termination fee. We agree with Cohen v. DIRECTV, Inc., supra, 142 Cal.App.4th at page 1452, which rejected the same argument T-Mobile makes. The court reasoned: “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. {Discover Bank, supra, 36 Cal.4th at p. 157 . . . .) 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 . . . .’ ” {Cohen, at p. 1452.) The same is true in this case.

Second, T-Mobile contends that the class action waiver would not exculpate the company from any wrongdoing because, unlike in Discover Bank, plaintiffs assert inarbitrable claims for public injunctive relief. However, under Discover Bank's reasoning, the class action waiver would at the very least effectively exculpate T-Mobile from the alleged fraud perpetrated on the class members, which is enough to bring this case within the scope of the Discover Bank holding. Moreover, Discover Bank rejected the argument that private lawsuits seeking injunctive relief and attorney fees awards are an adequate substitute for class actions. The court specifically stated that it was not persuaded that the problems posed by class action waivers are ameliorated by the availability of attorney fees awards in private litigation or the availability of public actions (brought by the Attorney General or other designated law enforcement officials) for injunctive relief and civil penalties. {Discover Bank, supra, 36 Cal.4th at p. 162; see also id. at p. 180 (dis. opn. of Baxter, J.).)

In the consumer context, class actions and arbitrations are “often inextricably linked to the vindication of substantive rights.” {Discover Bank, supra, 36 Cal.4th at p. 161.) There is nothing extraordinary about the circumstances of this case that distinguishes it from the typical consumer class actions described in Discover Bank. Because it is directly within the scope of the holding in that case, we conclude that the class action waiver has a high degree of substantive unconscionability. Applying the sliding scale test for unconscionability, even though the evidence of procedural unconscionability is limited, the evidence of substantive unconscionability is strong enough to tip the scale and render the arbitration provision unconscionable. The trial court properly denied the motion to compel arbitration.¹⁰

II. Federal Preemption*

Disposition

The order denying the motion to compel arbitration is affirmed. Costs are awarded to plaintiffs.

Simons, J., concurred.

1 The two cases from which these appeals arise are among the cases ordered consolidated in the Alameda County “Cellphone Termination Fee Cases," JCCP No. 4332. All cases concern unfair business practices actions against the seven major cell phone providers in California. For purposes of case management, the trial court divided the coordinated proceedings into three substantive topics: early termination, handset policies, and deposits.

2 The service agreements and terms and conditions applicable to plaintiffs are not identical, but the differences are not material to the issues on appeal. Throughout this decision we will use the documents applicable to plaintiff Adrianne Grant as exemplars.

3 Section 3 of the arbitration agreement provides: “you will first negotiate with [T-Mobile] IN GOOD FAITH TO SETTLE ANY CLAIM OR DISPUTE BETWEEN YOU AND US IN ANY WAY RELATED TO OR CONCERNING THE AGREEMENT, OR OUR PROVISION TO YOU OF GOODS, SERVICES OR UNITS (‘CLAIM’). YOU MUST SEND A WRITTEN DESCRIPTION OF YOUR CLAIM TO OUR REGISTERED AGENT. ... IF YOU DO NOT REACH AGREEMENT WITH US WITHIN 30 DAYS, INSTEAD OF SUING IN COURT, YOU AGREE THAT ANY CLAIM MUST BE SUBMITTED TO FINAL, BINDING ARBITRATION WITH THE AMERICAN ARBITRATION ASSOCIATION (‘AAA’) UNDER ITS PUBLISHED WIRELESS INDUSTRY ARBITRATION RULES, WHICH ARE A PART OF THE AGREEMENT BY THIS REFERENCE AND ARE AVAILABLE BY CALLING THE AAA AT [listed telephone number] OR VISITING ITS WEB SITE AT [listed]____You will pay your share of the arbitrator’s fees except (a) for claims less than $25, we will pay all arbitrator’s fees and (b) for claims between $25 and $1000, you will pay $25 for the arbitrator’s fee. You and we agree to pay our own other fees, costs and expenses including ....

“Neither you nor we may be a representative of other potential claimants or a class of potential claimants in any dispute, nor may two or more individuals’ disputes be consolidated or otherwise determined in one proceeding. While the prohibition on consolidated or classwide proceedings in this Sec. 3 will continue to apply: (a) you may take claims to small claims court, if they qualify for hearing by such court and (b) if you fail to timely pay amounts due, we may assign your account for collection and the collection agency may pursue such claims in court limited strictly to the collection of the past due debt and any interest or cost of collection permitted by law or the Agreement. YOU AND WE ACKNOWLEDGE AND AGREE THAT THIS SEC. 3 WAIVES ANY RIGHT TO A JURY TRIAL OR PARTICIPATION AS A PLAINTIFF OR AS A CLASS MEMBER IN A CLASS ACTION. IF A COURT OR ARBITRATOR DETERMINES THAT YOUR WAIVER OF YOUR ABILITY TO PURSUE CLASS OR REPRESENTATIVE CLAIMS IS UNENFORCEABLE, THE ARBITRATION AGREEMENT WILL NOT APPLY AND OUR DISPUTE WILL BE RESOLVED BY A COURT OF APPROPRIATE JURISDICTION, OTHER THAN A SMALL CLAIMS COURT. SHOULD ANY OTHER PROVISION OF THIS ARBITRATION AGREEMENT BE DEEMED UNENFORCEABLE, THAT PROVISION SHALL BE REMOVED, AND THE AGREEMENT SHALL OTHERWISE REMAIN BINDING."

4 Civil Code section 1671, subdivision (d) provides: “[A] provision in a contract liquidating damages for the breach of the contract is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the state of the case, it would be impracticable or extremely difficult to fix the actual damage.”

5 Oppression in the manner of formation of the contract is distinguished from substantive oppressiveness of the challenged provision. (See Armendariz, supra, 24 Cal.4th at p. 114 [referring to the “oppression” aspect of procedural unconscionability and also whether the challenged term is “substantively oppressive”]; Graham v. Scissor-Tail, Inc. (1981) 28 Cal.3d 807, 820 [171 Cal.Rptr. 604, 623 P.2d 165] [considering whether a contract provision is unduly oppressive in substance].) Even if the manner of formation of a contract involves oppression and thereby satisfies the procedural unconscionability element, the challenged provision is unenforceable only if it is unduly unfair or oppressive in substance.

6 The same day plaintiffs filed the fourth amended complaint against T-Mobile in the coordinated Cellphone Termination Fee Cases, plaintiffs’ counsel filed nearly identical third consolidated amended complaints against Nextel and Sprint. The Nextel and Sprint service agreements were attached to the respective complaints; these service agreements do not include arbitration provisions with class action waivers. T-Mobile’s argument is based exclusively on these pleadings. We are not confronted with evidence that a consumer was actually aware of the existence of alternate providers and aware or should have been aware that the contracts used by those providers lacked the challenged contractual term.

7 Notably, we believe the issue before us is properly framed as whether the existence of market choice negates the existence of oppression, not whether choice renders a contract nonadhesive. (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1319-1320 & fn. 6 [27 Cal.Rptr.3d 797]; see also Marin Storage, supra, 89 Cal.App.4th at pp. 1054—1056; Wayne v. Staples, Inc. (2006) 135 Cal.App.4th 466, 483 [37 Cal.Rptr.3d 544]; but see Szetela, supra, 97 Cal.App.4th at p. 1100.)

8 Such unusual circumstances were arguably present in Dean Witter, where the court held only that the challenged provision was not procedurally unconscionable “as to the sophisticated investor-attorney specializing in class action litigation involving financial institutions, who sought and obtained appointment here as the class representative.” {Dean Witter, supra, 211 Cal.App.3d at p. 772.) Where the plaintiff is highly sophisticated and the challenged provision does not undermine important public policies, a court might be justified in denying an unconscionability claim for lack of procedural unconscionability even where the provision is within a contract of adhesion.

9 The Supreme Court continued, “Thus, a contract of adhesion is fully enforceable according to its terms [citations] unless certain other factors are present which, under established legal rules—legislative or judicial—operate to render it otherwise.” (Graham v. Scissor-Tail, Inc., supra, 28 Cal.3d at pp. 819-820, fn. omitted.) One of the bases to refuse enforcement described by the Supreme Court is an “unconscionability” analysis focusing entirely on the degree of substantive unfairness of the challenged provision, which is parallel to the “substantive unconscionability” analysis in A & M Produce, supra, 135 Cal.App.3d 473. (Graham v. Scissor-Tail, Inc., at pp. 821-828; California Grocers Assn. v. Bank of America (1994) 22 Cal.App.4th 205, 213-214 [27 Cal.Rptr.2d 396].) The adhesive nature of the contract alone justifies scrutiny of the substantive fairness of the contractual terms. (Graham v. Scissor-Tail, Inc., at pp. 824-825.)

10 Arguably, the CLRA’s nonwaiver provision, Civil Code section 1751, provides an independent basis for affirming denial of the motion to compel arbitration. (See America Online, Inc. v. Superior Court (2001) 90 Cal.App.4th 1 [108 Cal.Rptr.2d 699]; Discover Bank, supra, 36 Cal.4th at pp. 158-159.) T-Mobile contends that the Federal Arbitration Act preempts any application of Civil Code section 1751 to deny enforcement of the arbitration provision, citing Ting v. AT&T (9th Cir. 2003) 319 F.3d 1126, 1147-1148. Because we conclude that the arbitration provision is unconscionable, we need not decide the Civil Code section 1751 issue or the other challenges to the service agreement raised by plaintiffs.

See footnote, ante, page 571.