Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_06-cv-01021/USCOURTS-casd-3_06-cv-01021-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Contract Dispute

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

ALICIA HOFFMAN and MARKET

TRADING, INC., individually and on

behalf of all other persons similarly

situated and on behalf of the general

public,

Plaintiffs,

CASE NO: 06-CV-1021 W (BLM)

ORDER DENYING

DEFENDANT’S MOTION TO

COMPEL ARBITRATION

 v.

CINGULAR WIRELESS, LLC,

Defendant.

Plaintiffs Alicia Hoffman and Market Trading, Inc., (collectively, “Plaintiffs”)

commenced this putative class action in the San Diego Superior Court in April 2006. 

Plaintiffs assert state-law causes of action for breach of contract, deceptive trade

practices in violation of the Consumers Legal Remedies Act, and unlawful,

fraudulent and unfair business acts in violation of the Business & Professions Code

§17200, et seq. These claims are premised on defendant Cingular Wireless’s alleged

misrepresentations regarding the conditions under which customers’ accrued

“rollover” minutes expire. 

Case 3:06-cv-01021-W-CAB Document 32 Filed 10/26/06 Page 1 of 13
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On May 10, 2006, Cingular removed the action to this Court under the Class

Action Fairness Act, 28 U.S.C. § 1332(d). Cingular now seeks to compel arbitration

under an arbitration provision that includes a class-action waiver. Plaintiffs oppose

the motion arguing that the class-action waiver renders the arbitration agreement

unconscionable under California law. The Court decides the matter on the papers

submitted and without oral argument pursuant to Civil Local Rule 7.1(d.1). For the

reasons stated below, the Court DENIES Cingular’s motion.

I. BACKGROUND

In February 2004, plaintiff Alicia Hoffman entered into a Wireless Service

Agreement (the “Agreement”) with Cingular for cellular telephone service. (Compl.

at ¶ 10.) Hoffman’s service plan provided 850 “anytime minutes” and included

Cingular’s “rollover” feature that allowed unused anytime minutes to roll over to the

next month. (Id. at ¶¶ 2, 10.) The monthly service fee was $59.99. (Id. at ¶ 10.) 

Hoffman alleges that the terms of Cingular’s monthly plan provided that rollover

minutes would only expire under three well-defined circumstances: (1) after twelve

months; (2) upon default; or (3) if she switched to a non-rollover plan. (Id. at ¶ 11.)

Hoffman’s Agreement included an arbitration provision located approximately

5/6 of the way down the second page in what appears to be four or five point font. 

(See Plt.’s P. & A., at 4:9–10; Decl. of Neil Berinhout, Ex. “A” at 2.) The provision

covers “all disputes and claims arising out of or relating to this Agreement, or to any

prior oral or written agreement for equipment or services between Cingular and you.” 

(Decl. of Neil Berinhout, Ex. “A” at 2.) Under the agreement, customers may pursue

claims in arbitration or small claims court. (Id.) If the customer chooses arbitration,

“Cingular will pay all AAA filing, administration and arbitrator fees” unless the

arbitrator finds that the claim or relief sought is frivolous, and Cingular is obligated

to “reimburse [the customer] for [his or her] reasonable attorneys’ fees and expenses

incurred for the arbitration” if the customer recovers the amount of his or her

demand or more. (Id.) The provision also states that “YOU AND CINGULAR

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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.” (Id., emphasis in original.) If, however, this

class-action waiver is “found to be unenforceable, then the entirety of [the]

arbitration clause shall be null and void.” (Id.) 

On October 7, 2004, Hoffman added plaintiff Market Trading, Inc., to her

account and continued to use her cell phone as she had before. (Compl. at ¶ 12.) 

Because the 850 anytime minutes provided by Hoffman’s plan far exceeded her

needs, by October 2005, Hoffman had accumulated more than 10,000 rollover

minutes. (Id.) Accordingly, in October 2005, Hoffman contacted Cingular to switch

to a rollover plan with fewer anytime minutes so she could begin to use the

accumulated minutes. (Id.) Hoffman alleges that Cingular’s customer service

representative stated that she would not be allowed to keep all of the unused minutes

because she was switching to a rate plan with fewer anytime minutes. (Id.) The

customer service representative further stated that Cingular would allow Hoffman to

transfer only the number of rollover minutes equivalent to her new plan’s monthly

anytime minute allowance. (Id.) In other words, if Hoffman’s new plan provided

only 500 monthly anytime minutes, she would only be allowed to transfer 500 of her

unused rollover minutes to the new plan.

On April 6, 2006, Plaintiffs filed this lawsuit in the San Diego Superior Court. 

The lawsuit is brought on behalf of Plaintiffs and “all persons who subscribed to

[Cingular’s] cellular telephone rate plan that included the ‘rollover’ minutes feature

in the state of California from March 14, 2002, until March 14, 2006.” (Compl. at ¶

26.) Plaintiffs allege, among other things, that Cingular engaged in the business

practice of intentionally misrepresenting the conditions under which the rollover

minutes would expire. (Id. at ¶¶ 49–50.) Plaintiffs further allege that the case

involves “a large number of individual customers with many relatively small claims.” 

(Id. at ¶ 32(b).) 

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 Included with Cingular’s motion to compel arbitration is a request for judicial notice.

Cingular’s request is granted.

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On May 10, 2006, Cingular removed this action, and Plaintiffs’ subsequent

motion to remand was denied. Cingular now seeks to compel arbitration and thereby

dismiss the proposed class litigation.1

II. DISCUSSION

A. Legal Standard.

The Federal Arbitration Act (“FAA”) governs disputes involving written

contracts that touch upon interstate commerce or maritime law. 9 U.S.C. § 1. 

Under the FAA, 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. In interpreting an arbitration agreement, courts must give

due regard to the federal policy favoring such agreements, and thus any doubt

concerning the scope of arbitrable issues should be resolved in favor of arbitration. 

Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983);

Quakenbush v. Allstate Ins. Co., 121 F.3d 1372, 1380 (9th Cir. 1997). 

There is no dispute that Cingular’s written Agreement involves interstate

commerce, and thus is covered by the FAA. Instead, the dispute centers on whether

the class-action waiver renders the arbitration provision unconscionable under

California law and, if so, whether the FAA preempts California law. 

B. Unconscionability.

Although the FAA reflects a policy favoring arbitration agreements, such

agreements are nevertheless subject to all defenses to enforcement that apply to

contracts generally. See 9 U.S.C. § 2; Ingle v. Circuit City Stores, Inc., 328 F.3d

1165, 1170 (9th Cir. 2003). Thus, in evaluating the validity of an arbitration

agreement, a court may apply generally applicable contract defenses, including

unconscionability, to invalidate the agreement. Laster v. T-Mobile USA, Inc., 407

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F.Supp. 2d 1181, 1187 (SD Cal. 2005) (citing Ticknor v. Choice Hotels Int’l, Inc.,

265 F.3d 931, 937 (9th Cir. 2001)).

Unconscionability under California law consists of a procedural and

substantive element. Armendariz v. Foundation Health Psychcare Servs., Inc., 24

Cal.4th 83, 114 (2000). Procedural unconscionability focuses on “oppression” or

“surprise” that may result from unequal bargaining power between the contracting

parties, while the substantive element focuses on whether the contract terms are

overly harsh or one-sided. Discover Bank v. Superior Court, 36 Cal.4th 148, 160

(2005). While both procedural and substantive unconscionability must be present to

render a contract unenforceable, they “need not be present in the same degree.” 

Armendariz, 24 Cal.4th at 114. Rather, a sliding scale approach is used so that the

more substantively oppressive the contract term, the less procedural

unconscionability is required to find the contract unenforceable, and vice versa. Id.

In Discover Bank, the California Supreme Court evaluated whether a classaction waiver in an arbitration provision was unconscionable. Plaintiff opened a

credit card account with Discover in April 1986. In 1991, Discover amended the

terms of the customer agreement to add an arbitration clause that included a classaction waiver. Ten years later, plaintiff filed a putative class action alleging that

Discover made misrepresentations regarding the imposition of late fees and finance

charges. 

Discover moved to compel arbitration and dismiss the class action under the

terms of the arbitration provision. Plaintiff opposed the motion arguing that the

class-action waiver was unconscionable. The Court began its analysis by reiterating

the justifications for class-action litigation:

 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

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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.

Discover Bank, 36 Ca.4th at 156 (citing Vasquez v. Superior Court, 4 Cal.3d 800,

808 (1971)). In light of these justifications, the Court was concerned with classaction waivers that act as “exculpatory contracts . . . to the extent they operate to

insulate a party from liability that otherwise would be imposed under California law.” 

Id. at 161. The Court clarified, however, that not all class-action and arbitration

waivers are exculpatory clauses. Id. “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’ . . . the class action is often the

only effective way to halt and redress such exploitation.” Id. (citations omitted). 

Accordingly, the Court held that class-action waivers are unconscionable when

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.” Id. at 162–163.

1. Cingular’s arbitration agreement is procedurally

unconscionable.

The first issue is whether Cingular’s arbitration provision is procedurally

unconscionable. For the following reasons, the Court finds that it is.

Cingular’s website states that it is the “largest wireless company in the United

States, with more than 54 million subscribers.” (See http://www.cingular.com/

about/company_overview.) Additionally, the Agreement at issue in this case was

drafted by Cingular, who admits that the arbitration provision is part of a form

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2

 Although Cingular cited four cases, two of the cases do not support the contention that the

availability of market alternatives precludes a finding of procedural unconscionability. In Crippen v.

Central Valley RV Outlet, Inc., 124 Cal.App.4th 1159 (2004), plaintiff argued that an arbitration

clause in a purchase contract for a recreational vehicle was procedurally unconscionable solely because

defendant used a form contract. While the court acknowledged that market alternatives were

relevant, the decision was primarily based on the parties’ relative bargaining power: “[there] is no

reason in this case to conclude that plaintiff lacked power to bargain. In general, nothing prevents

purchasers of used vehicles from bargaining with dealers, even though dealers use form contracts, and

nothing in the record shows that plaintiff could not bargain in this case.” Id. at 1165-1166. 

Nor is the Court persuaded by Wayne v. Staples, Inc., 135 Cal.App.4th 466 (2006), which

involved a challenge to the price charged for shipping insurance. Wayne is factually distinguishable

from cases such as this, where the challenged term is printed in 4 or 5 point font on the second page

of a boilerplate contract. Wayne is also distinguishable because it did not involve a challenge to a

class-action waiver, and thus Discover Bank’s concern about exculpatory contracts was not implicated.

- 7 - 06CV1021

contract using uniform terms. (Def.’s P. & A., at 5:26–27; Decl. of Neal S.

Berinhout, at ¶ 4.) Based on these facts, Cingular’s Agreement has all the hallmarks

of a contract of adhesion; it is a form contract prepared by the party with superior

bargaining power and given to the subscribing party on a “take it or leave it” basis.

See Discover Bank, 36 Cal.4th at 160 (“The procedural element of an

unconscionable contract generally takes the form of a contract of adhesion ‘which,

imposed and drafted by the party of superior bargaining strength, relegates to the

subscribing party only the opportunity to adhere to the contract or reject it.’”). 

Cingular, however, argues that Plaintiffs had market alternatives because the

service agreements of four wireless companies either do not include arbitration

provisions or do not include a class-action waiver. Cingular further contends that

California law precludes a finding of procedural unconscionability where there are

market alternatives available to the consumer. The Court disagrees for two reasons. 

First, California courts have reached different conclusions regarding the

impact of market alternatives. While two of the cases cited by Cingular support the

conclusion that market alternatives preclude procedural unconscionability, other

cases disagree.2

 See Villa Milan Homeowners Assn. V. Il Davorage, 84 Cal.App.4th

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819, 827 (2000) (“[I]n a given case, a contract might be adhesive even if the weaker

party could reject the terms and go elsewhere.”); Szetela, 97 Cal.App.4th at 1100

(“[W]hether [plaintiff] Szetela could have found another credit card issuer who

would not have required his acceptance of a similar clause is not the deciding

factor.”). And while the California Supreme Court has not yet resolved the apparent

conflict, it is notable that Szetela was one of the two cases that Discover Bank relied

heavily upon in finding the class-action waiver unconscionable. See Discover Bank,

36 Cal.4th at 159–160. Moreover, among the exhibits attached to Cingular’s moving

papers are selected portions of the appellate record from Discover Bank. The

exhibits establish that the defendant raised the issue of market alternatives, which

the Supreme Court ignored in its analysis. While Discover Bank cannot be

interpreted as resolving the conflict, the Court is nevertheless persuaded by the

California Supreme Court’s reliance on Szetla and the fact that the existence of

market alternatives did not preclude the finding that Discover’s arbitration clause

was procedurally unconscionable.

Second, aside from the split among the state appellate courts, Cingular’s

argument has now been rejected by three cases within this Circuit. In Ting v.

AT&T, 319 F.3d 1126, 1149 (9th Cir. 2003), the Ninth Circuit interpreted the

California Supreme Court’s decision in Armendariz, 24 Cal.4th 83, as rejecting the

“contention that availability of alternative sources of supply affects the procedural

unconscionability analysis.” Thereafter, the district court in Laster found that even

“if a court were to consider the availability of alternative sources of supply, the court

must evaluate the consumer’s opportunity to negotiate the arbitration provision.” Id.

407 F.Supp.2d at 1188. Finally, recently the district court in Winig v. Cingular

Wireless LLC, – F.Supp.2d– 2006 WL 2766007, at *4 (N.D.Cal. Sept. 27, 2006),

rejected Cingular’s argument for the same reasons expressed in this decision. 

Accordingly, the Court finds that the availability of market alternatives does not

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preclude the finding that Cingular’s arbitration provision is procedurally

unconscionable under Discover Bank. 

2. Cingular’s arbitration agreement is substantively

unconscionable.

Because the Agreement at issue is a consumer contract, Cingular’s arbitration

provision is substantively unconscionable under Discover Bank if (1) it is in “a

setting in which disputes between the contracting parties predictably involve small

amounts of damages” and (2) this lawsuit involves allegations of a “scheme to

deliberately cheat large numbers of consumers out of individually small sums of

money.” Discover Bank, 36 Cal.4th at 162–163; see also Laster, 407 F.2d at 1190. 

The parties do not dispute that this lawsuit involves allegations that Cingular

engaged in a scheme to deliberately cheat large numbers of customers out of their

“rollover minutes.” (See Compl. at ¶¶ 48–52.) Instead, the parties disagree about

whether the damages at issue are small under Discover Bank. Additionally, Cingular

argues that regardless of the size of damages, its arbitration agreement is not

substantively unconscionable because it obligates Cingular to pay certain costs of

arbitration and, under certain circumstances, reimburse the customer’s reasonable

attorney’s fees.

a. Plaintiffs’ damages are small.

Cingular argues that Plaintiffs’ damage claims are not small within the

meaning of Discover Bank. To support this argument, Cingular calculates Plaintiffs’

maximum damages based on the request in the Complaint for the recovery of “all

purchase monies for . . . the cellular telephone plan service fees paid” by Plaintiffs. 

(Def.’s P. & A., at 8:28–9:1.) Because Plaintiff Hoffman was a customer from

February 2004 until July 2006, Cingular calculates her alleged damages at $2,825,

which Cingular points out are nearly 100 times greater than the $29 at issue in

Discover Bank. Additionally, Cingular relies on Provencher v. Dell, Inc., 409 

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F.Supp.2d 1196, 1202 (C.D. Cal. 2006), which it contends found that a damage

claim for $1,600 was not small under Discover Bank. 

The Court is not persuaded by Cingular’s argument for several reasons. First,

assuming Cingular’s approach to the damage issue is correct, the Court finds that

$2,875 is small. In Cohen v. DirecTV, 142 Cal.App.4th 1442 (2006), decided after

Discover Bank, plaintiff filed a lawsuit alleging that DirecTV covertly degraded

certain high-definition transmissions in violation of various California statutes. 

DirecTV moved to compel arbitration, and plaintiff opposed the motion arguing that

the class-action waiver was unconscionable. DirecTV countered by arguing that the

amount at stake — the $10.99 monthly charge and $1,000 in equipment purchased

by the customers — was not small under Discover Bank. The Court of Appeal

disagreed:

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.” 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.

Id. at 1452 (citing Discover Bank, 36 Cal.4th at 157). Thus, Cohen stands for the

proposition that in evaluating the damages, courts do not only consider the amount

in question, but also whether the amount is sufficient to “warrant individual

litigation” and “to obtain legal assistance in prosecuting the claim.” Id.

Cohen’s approach is consistent with the concerns underlying Discover Bank,

which were to prevent the party of superior bargaining power from imposing contract

terms that effectively insulate it from liability. While $2,875 may be sufficient to

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warrant litigation and retain counsel in some cases, it is clearly not sufficient, for

example, in cases such as this involving claims for deceptive trade practices where

the plaintiff will likely incur significant costs in discovery and investigation. 

Second, Cingular’s reliance on Provencher v. Dell is unavailing. Although

Provencher discusses California law, the district court held that Texas law, not

California law, governed the case. Id. at 1201. Additionally, while Provencher

acknowledged that plaintiff “spent over $1,600 for [his] Dell computer,” the district

court’s determination that the damages were not small was based on the entire class’s

alleged damages, not the $1,600 that plaintiff paid for the computer. See Id. at 1202

(“Obviously this case involves a significant amount of money, most likely hundreds

of millions of dollars.”). Indeed, the Court of Appeal in Cohen criticized Provencher

for basing its determination on the class’s damages. See Cohen, at 1455 n. 13 (“We

do not find Provencher’s analysis compelling, particularly as to the ‘significant amount

of money, most likely hundreds of millions of dollars,’ involved, because the court

focuses on aggregate amounts, not individual amounts.”).

Third, although the Complaint includes a request for the recovery of all

monthly fees, Plaintiffs state in the opposition that the damages sought are for the

lost value of confiscated “rollover minutes” or “anytime minutes.” (Pl.’s P. & A., at

2:14–18, 9:23–24.) Because unused “rollover minutes” expire after 12 months,

Plaintiffs assert that their individual damages are limited to 12-months worth of

unused minutes, which totals $714. (Id. at 2:14–18, 10:3–8.) This amount is less

than the damages at issue in Cohen. Accordingly, the Court finds that Plaintiffs’

damages are small under Discover Bank.

b. Cingular’s arbitration agreement is substantively unconscionable

notwithstanding the obligation to pay certain costs.

Cingular contends that its arbitration agreement is not substantively

unconscionable because consumers are “not required to pay greater costs than they

would have to bear in court and the arbitrator is not prohibited from awarding a

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prevailing plaintiff his or her attorneys’ fees.” (Def.’s P. & A., at 10:3–5.) 

Cingular’s argument was addressed and rejected in Discover Bank: “Nor are

we persuaded by the rationale stated by some courts that the potential availability of

attorneys fees to the prevailing party in arbitration... ameliorates the problems posed

by such class action waivers.” 36 Cal.4th at 162 (citations omitted); see also Laster,

407 F.Supp.2d at 1191 (rejecting argument that payment of arbitration costs and

reasonable attorney’s fees precludes finding of substantive unconscionability). 

Because the issue is governed by California law, the Court finds Discover Bank

controls. Thus, Cingular’s arbitration provision is unconscionable.

C. Preemption.

Cingular’s final argument is that if its arbitration provision is unconscionable

under Discover Bank, the FAA preempts California law. (Def.’s P. & A., at

14:8–10.) Cingular’s argument is without merit.

By its express terms, the FAA provides that arbitration agreements are valid

and enforceable, “save upon such grounds as exist at law or in equity for the

revocation of any contract.” 9 U.S.C. § 2; Ingle, 328 F.3d at 1170 (“[W]hen grounds

exist ‘at law or in equity for the revocation of any contract,’ courts may decline to

enforce such contracts.”) (citing Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681,

683 (1996)). This prevents discrimination against arbitration agreements by

requiring that they are placed on equal footing with other contracts. EEOC v.

Waffle House, Inc., 534 U.S. 279, 293 (2002). 

California’s doctrine of unconscionability is a generally applicable defense to

contracts. See Ingle, 328 F.3d at 1170. Accordingly, California’s unconscionability

doctrine is not preempted by the FAA. Ting, 319 F.3d at 1152; Laster, 407 F.

Supp.2d at 1192 (“The concept of unconscionability . . . may be employed as a

principle of general applicability to invalidate an arbitration agreement without

contravening § 2 of the FAA.”).

III. CONCLUSION AND ORDER

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In light of the foregoing, the Court finds that the class-action waiver contained

in Cingular’s arbitration provision is unconscionable under California law. Because

the arbitration provision specifically provides that it is null and void if the classaction waiver is unenforceable, Cingular’s motion to compel arbitration is DENIED. 

IT IS SO ORDERED.

DATED: October 26, 2006

Hon. Thomas J. Whelan

United States District Judge

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