Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_07-cv-04486/USCOURTS-cand-4_07-cv-04486-1/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 28:1332 Diversity-Injunctive &amp; Declaratory Relief

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

ZOLTAN STEINER, et al.,

Plaintiff,

 v.

APPLE COMPUTER, INC., et al.,

Defendant. 

No. C 07-04486 SBA

ORDER

[Docket No. 38]

REQUEST BEFORE THE COURT

Before the Court is defendant AT&T Mobility, LLC’s Motion to Compel Arbitration and to

Dismiss Claims Pursuant to the Federal Arbitration Act (the “Motion”) [Docket No. 38]. Defendant

AT&T Mobility, LLC (“AT&T”), under the Federal Arbitration Act (the “FAA”), 9 U.S.C. § 1 et

seq., seeks to compel plaintiffs, Zoltan and Ynez Stiener to individually arbitrate their disputes,

regarding allegedly hidden and substantial battery-changing and related charges associated with

using their iPhones, under the Arbitration Agreement of a Terms of Service agreement between the

parties, while the Stieners seek to resolve the issue by class action. 

Under Federal Rule of Civil Procedure 78(b), the Court find the Motion appropriate for

disposition without a hearing. In doing so, the Court is bound by the Ninth Circuit’s holding in

Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007), finding

unconscionable a prior version of an AT&T class arbitration waiver. Although AT&T has attempted

to modify the class arbitration wavier before the Court, to comply with the Ninth Circuit’s holding in

Shroyer, it has failed to do so. The Court thus finds the class arbitration waiver unconscionable, and

thus unenforceable. As the waiver cannot be severed from AT&T’s entire Arbitration Agreement, it

too must fail. Lastly, under Shroyer, the Court finds the FAA does not preempt invalidating the

class arbitration wavier on this ground. AT&T’s motion to compel arbitration is thus DENIED.

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1 “GB” stands for “gigabyte.” The prefix “giga” means “one billion,” and the suffix “byte”

means “one data character,” such as one letter, number, or symbol. A four GB phone presumably

holds four billion pieces of data, i.e., four billion letters, numbers, and/or symbols.

2

BACKGROUND

I. The Stieners purchase two iPhones.

Plaintiffs, the Stieners, are California residents. Docket No. 1 ¶ 3 (Compl.). On June 29,

2007, they purchased two iPhones at a San Francisco store, for $599 each, plus tax. Id. ¶ 29; see

also Docket No. 42 ¶ 6 (Decl. of Neal S. Berinhout in Supp. of the Mot. (“Berinhout Decl.”)). An

iPhone “combines three amazing products—a mobile phone, a widescreen iPod and a breakthrough

Internet device—into one small, lightweight, handheld device with desktop-class email, web

browsing, searching and Google Maps.” Docket No. 39, Ex. “4” at 1, col. 1, para. 1 (“AT&T Plans

for iPhone” pamphlet). 

Defendant Apple Computer, Inc. (“Apple”) apparently manufactures the iPhone. 

Docket No. 39, Ex. “2” at 1, para. last (“iPhone is a trademark of Apple Inc.”) (“A few things you

should know about purchasing and activating an iPhone” sheet (the “Fact Sheet”)). Allegedly,

Apple began selling iPhones on June 29, 2007 for $499 for a four GB1

 model and $599 for an eight

GB model. Compl. ¶ 22. Apple allegedly sold 270,000 phones in the first 30 hours of release,

passing the 500,000 mark within a week. Id. ¶ 23. Apple also sells iPhones through AT&T’s stores. 

Id. ¶ 24.

II. Activation and the Terms of Service

AT&T and Apple “have an exclusive relationship” regarding the iPhone. Id.; Fact Sheet at

1, para. 1. As a result, to use wireless service on their iPhones, all users, including the Stieners,

must activate them online with AT&T, through an Apple iTunes web site. See id., para. 2; see

Berinhout Decl. ¶ 9. In the Stieners’ case, as a condition of using their phones, they were forced to

purchase a two-year service plan from AT&T. Compl. ¶ 29. 

As part of the activation process, they had to click on a box next to the statement, “I have

read and agree to the AT&T Service Agreement.” Berinhout Decl. ¶ 9. The text of the agreement,

including its terms of service, is displayed in a “scrolling” text box immediately above this

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3

statement. Docket No. 39, Ex. “4” at 7 (“Consumer iTunes Activation Process” web p. images). 

The first sentence displayed in the scrolling text box, advised the Stieners by checking the check box

below, they would be “bound” to “the Terms of Service, including the binding arbitration clause.” 

Id. The Terms of Service were also available on AT&T’s web site and in a booklet kept at the store

where the Stieners bought their iPhones. Berinhout Decl. ¶ 8. In addition, AT&T mailed the

Stieners a Terms of Service booklet after they activated their iPhones. Id. ¶ 10. 

III. The Binding Arbitration Agreement

The Terms of Service contain an Arbitration Agreement (the “Arbitration Agreement”)

consisting of seven paragraphs. 

A. The First Paragraph: Scope

The first paragraph states the Arbitration Agreement “is intended to be broadly interpreted.” 

Docket No. 39, Ex. “3” at 12 ¶ (1) (Terms of Svc. (“TOS”) booklet). It includes but is not limited to

claims arising in tort, contract, statute, or other legal theory, arising before the AT&T Services

Agreement took effect, or which are then currently the subject of a class-action suit of which the

consumer is not a member, or which arise after this agreement terminates. Id. It does not bar a

consumer, however, from seeking relief in small claims court. Id. It specifies, in bold typeface,

however, “by entering this Agreement, you and AT&T are each waiving the right to trial by jury or

to participate in a class action.” Id. It purports to be governed by the Federal Arbitration Act. Id. 

B. The Second Paragraph: Pre-arbitration Dispute Resolution

The Arbitration Agreement’s second paragraph says a person wishing to arbitrate must first

send a written notice to AT&T at a specific address in Atlanta, Georgia. Id. ¶ (2). If the dispute is

unresolved 30 days after AT&T receives the notice, the person may seek arbitration with the

American Arbitration Association (“AAA”). Id. at 13 ¶ (2). 

C. The Third Paragraph: Arbitration Procedures

The Arbitration Agreement’s third paragraph says once the person begins arbitration, they

may pay the filing fee, and AT&T will reimburse them for it, apparently $125 for disputes under

$10,000; or, they may seek a pauper’s wavier from AT&T, which will then pay it. Id. at 13 ¶ (3). 

Unless otherwise agreed, arbitration occurs in the county containing the person’s billing address. Id.

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2 In California, small claims actions for natural persons are capped at $7,500 in damages. Cal.

Code Civ. Proc. § 116.221.

3 AT&T does not use leading capitals for “premium” or “attorney premium,” but the Court

does for clarity.

4

Claims for $10,000 or less may be handled by written filings, telephonic hearing, or in-person

hearing, at the person’s choice. Id. Hearings for claims over $10,000 will be handled under the

AAA rules, unspecified in the TOS booklet. Id. AT&T pays for all filing, administration, and

arbitrator fees, unless the arbitrator finds the claim was frivolous under Federal Rule of Civil

Procedure 11(b), in which case fees will be paid under the AAA rules, and the person will reimburse

AT&T for any payments made which are the person’s responsibility under these rules. Id.

D. The Fourth and Fifth Paragraphs: The Premium and the Attorney Premium

The fourth and fifth paragraphs address costs, fees, and damages: If a person prevails on the

merits at arbitration, and receives an award: (1) equal to or less than the greater of (a) $5,000; or (b)

the maximum jurisdictional dollar amount for small claims actions in the county containing the

person’s billing address;2

 and (2) greater than AT&T’s last written offer prior to selecting an

arbitrator; then AT&T will pay the greater of (1) or (2) instead of the award (AT&T calls this “the

Premium”), and pay the person’s attorney double their fees and reimburse them for reasonable costs

(AT&T calls this “the Attorney Premium”).3 Id. at 14 ¶ (4). 

AT&T will also pay these premiums, if it fails to make a written offer prior to the selection

of an arbitrator, and the person prevails and receives any relief. Id. In addition, the person may also

seek any attorney’s fees available under the applicable law, but only to the extent they exceed the

Attorney Premium. Id. at 15 ¶ (5). Lastly, AT&T agrees not seek any costs or attorney’s fees. Id.

E. The Sixth Paragraph: The Class Arbitration Waiver and Severance

The sixth paragraph reiterates in boldface all-capital typeface, “YOU AND AT&T AGREE

THAT EACH MAY BRING CLAIMS AGAINST THE OTHER ONLY IN YOUR OR ITS

INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY

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4 The seventh paragraph merely addresses how AT&T may amend the Arbitration Agreement.

5

PURPORTED CLASS OR REPRESENTATIVE PROCEEDING.” Id. at 15 ¶ (6). It also bars class

arbitration. Id. And, it states, “If this specific provision is found to be unenforceable, then the

entirety of this arbitration provision shall be null and void.”4 Id.

The Arbitration Agreement is silent regarding the confidentiality of any proceedings or

awards and whether or not punitive damages are available. See id. at 12-15; Mot. at 4, paras. 5-6.

IV. The Stieners sue over the iPhone battery fees.

On August 29, 2007, the Stieners filed suit in this Court against AT&T and Apple, alleging

the iPhone has a battery inside which cannot be removed by a consumer, but which must be replaced

after approximately 300 charges, i.e., about once a year or less. Compl. ¶¶ 25-26. To change the

battery, Apple allegedly charges $79.00, plus $6.95 shipping and handling. Id. ¶ 27. Apple also

allegedly charges $29.00 for the use of an “AppleCare Service Phone” while the battery is being

replaced. Id. ¶ 28. The Stieners claim they were not informed at the time of purchase of the costs

and procedures of replacing the battery. Id. ¶ 30. Allegedly, neither the box the iPhone was sold in

nor the written information within explained the costs and procedures required to change the iPhone

battery. Id. Further, the Stieners allege neither Apple nor AT&T disclosed any of this information

to consumers in the months of promotion leading up to the initial sale date nor at the time of sale. 

Id. ¶ 31.

In their complaint, the Stieners seek to certify a class of all iPhone consumers. Id. ¶¶ 32-44. 

They claim breach of contract, violation of the implied warranty of merchantability, fraudulent

concealment, and unfair competition under section 17200 et seq. of the California Business and

Professions Code. Id. ¶¶ 45-59. They seek an accounting, consequential and direct damages,

restitution, and fees and costs. Id. at 9.

V. AT&T’s Motion and the Stieners’ Opposition

On November 21, 2007, AT&T filed the Motion, under the Federal Arbitration Act (the

“FAA”), 9 U.S.C. § 1, et seq., seeking to compel the Stieners to arbitrate under the Arbitration 

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5 Title 9 U.S.C. § 3 states:

If any suit or proceeding be brought in any of the courts of the United States

upon any issue referable to arbitration under an agreement in writing for such

arbitration, the court in which such suit is pending, upon being satisfied that the issue

involved in such suit or proceeding is referable to arbitration under such an

agreement, shall on application of one of the parties stay the trial of the action until

such arbitration has been had in accordance with the terms of the agreement,

providing the applicant for the stay is not in default in proceeding with such

arbitration.

In addition, 9 U.S.C. § 4 states:

A party aggrieved by the alleged failure, neglect, or refusal of another to

arbitrate under a written agreement for arbitration may petition any United States

district court which, save for such agreement, would have jurisdiction under Title 28,

in a civil action or in admiralty of the subject matter of a suit arising out of the

controversy between the parties, for an order directing that such arbitration proceed

in the manner provided for in such agreement. 

6 AT&T is an affiliate of New Cingular Wireless Services, Inc., which was created by the

merger of AT&T Wireless Services, Inc. and Cingular Wireless, LLC. Shroyer, 498 F.3d at 979;

Docket No. 45 at 1 n.1 (Pls.’ Opp’n to Defs.’ Mot. (“Opp’n”)); Mem. at 12:9-12. In this Order, New

Cingular Wireless Services, Inc. is referred to as AT&T.

6

Agreement.5 See Mot. at 2; Mem. at 1:3-5. In its Memorandum of Points and Authorities, AT&T

correctly anticipates:

The Stieners will likely oppose this motion by arguing that, because their

arbitration agreement requires the resolution of disputes on an individual basis, they

are unconscionable under the California Supreme Court’s decision in Discover

Bank v. Superior Court, 113 P.3d 1100 (Cal. 2005), and the Ninth Circuit’s decision

in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007).

Mem. at 1:15-19.

In Shroyer, decided last August, the Ninth Circuit found unconscionable a different version

of an AT&T6

 class arbitration waiver, Shroyer, 498 F.3d at 978. AT&T argues, however, “Discover

did not impose an across-the-board ban on class-arbitration waivers in consumer contracts, and

Shroyer invalidated an earlier—and materially different—version of the arbitration provision at

issue in this case.” Mem. at 1:19-22. AT&T claims through “unprecedented” enhancements to its

earlier class arbitration waiver, including revising the filing fee provisions, adding the Premium and

the Attorney Premium, and waiving its right to costs and fees, it has addressed Discover Bank’s and

Shroyer’s concern that “when the potential for individual gain is small, very few plaintiffs, if any,

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7

will pursue individual arbitration or litigation, which greatly reduces the aggregate liability a

company faces when it has exacted small sums from millions of consumers.” Mem. at 1:22-2:2

(quoting Shroyer, 498 F.3d at 986 (citing Discover Bank, 113 P.3d at 1106-10)).

In a related argument, AT&T argues the FAA preempts any application of California’s

unconscionability law to the Arbitration Agreement, because while “the FAA permits courts to

refuse to enforce arbitration agreements based on generally applicable state [contract] law

principles. . . . it would require a marked deviation from those principles to invalidate” AT&T’s

enhanced Agreement. Mem. at 2:4-9. “To call this provision ‘unconscionable’ notwithstanding the

incentives it provides to customers and their lawyers would be to drain the concept of

‘unconscionability’ of all meaning.” Id. at 2:15-17. Thus, in AT&T’s view, because its class

arbitration wavier is allegedly “conscionable,” were the Court to strike it down as unconscionable, it

would not be applying generally applicable state contract law, but merely using that as cover to

covertly strike down a class arbitration waiver, solely because it is a class arbitration waiver, in

violation of the FAA.

As discussed below, however, for the reasons stated by the Ninth Circuit in Shroyer, the

Court finds the class arbitration waiver of the Arbitration Agreement operates as an exculpatory

clause, and is thus unconscionable, and thus unenforceable. Likewise, under Shroyer, the Court

finds the FAA does not preempt invalidating the class arbitration waiver on this ground. The Court

thus denies AT&T’s motion to compel arbitration.

ANALYSIS

I. Subject-Matter Jurisdiction

The Court has class-diversity subject-matter jurisdiction under 28 U.S.C. § 1332(d)(2)(A),

which states:

The district courts shall have original jurisdiction of any civil action in which the

matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest

and costs, and is a class action in which--(A) any member of a class of plaintiffs is a

citizen of a State different from any defendant . . . .

28 U.S.C. § 1332(d)(2).

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7 The Court declines to consider Preston v. Ferrer, __ U.S. ___, No. 06-1463, 2008 WL

440670, 2008 U.S. LEXIS 2011 (Feb. 20, 2008), submitted to the Court, by AT&T, on February 21,

2008, under Civil Local Rule 7-3 [Docket No. 50], because the decision is not settled law until the

25-day period for filing a motion for rehearing has expired. See U.S. R. 44. Further, while Preston

concerns the FAA, it does not address unconscionability, so its application here is questionable.

Likewise, the Court notes but declines to apply to this matter, Lowden v. T-Mobile USA, Inc., 512 F.3d 1213 (9th Cir. 2008), submitted by the Stieners, on February 22, 2008, under Civil Local

Rule 7-3(d), because it does not involve an arbitration agreement with terms similar to the Premium

or Attorney Premium, and it actually appears to have terms somewhat more onerous than those in

the Arbitration Agreement before the Court. See Lowden, 512 F.3d at 1215-16. Further, although

the Ninth Circuit did strike down T-Mobile’s class arbitration waiver, it did so in a fairly

straightforward manner, under Washington common law, citing as necessary to its detailed analysis

in Shroyer, but did not add anything new to this area of the law.

8

It is undisputed the damages at issue here, roughly $117 in allegedly hidden fees, for at least

500,000 iPhone consumers, the putative class members, would exceed $5,000,000. Further, it is

undisputed iPhone consumers are found throughout the United States. Thus, the Court has classdiversity subject-matter jurisdiction.

II. AT&T’s class arbitration waiver is unconscionable.

Despite its purported enhancements, analyzing AT&T’s class arbitration waiver under

Shroyer, the Court finds it unconscionable.7

 

A. Shroyer v. New Cingular Wireless Services, Inc.

In Shroyer, the plaintiff alleged when a cellular telephone services affiliate of AT&T and

another wireless entity merged, consumers using the prior AT&T affiliate suffered a deterioration in

service. Shroyer, 498 F.3d at 979. He also alleged when he complained, the new entity told him and

similarly situated consumers to switch their service to the new merged entity, so they could receive a

new computer chip, to address the problem. Id. To obtain it, however, he and these other

consumers had to extend their service contracts with the new entity, at higher rates than they were

previously paying. Id. 

Nonetheless, Shroyer switched his service, and in doing so, bound himself to a contract

which included the following language:

You and [AT&T] agree that YOU AND [AT&T] 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. 

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9

Further, you agree that the arbitrator may not consolidate proceedings of more than

one person’s claims, and may not otherwise preside over any form of representative

or class proceeding, and that if this specific proviso is found to be unenforceable,

then the entirety of this arbitration clause shall be null and void.

Id. at 979-80.

Shroyer then filed a class action against AT&T claiming various causes of action, including

breach of contract, breach of the covenant of good faith and fair dealing, fraud and deceit under

section 1710 of the California Civil Code, and unfair competition under section 17200 of the

California Business and Professions Code. Id. at 979. AT&T removed the action to federal court

and filed a motion to compel arbitration under the FAA. Id. at 980. AT&T claimed the class

arbitration waiver was conscionable, and alternatively, the FAA preempted any application of

California’s unconscionability law to the waiver. Id. at 980-81. The district court granted the

motion. Id. at 981.

In reversing, the court noted, “Section 2 of 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.” Shroyer, 498 F.3d at 981

(emphasis added). It also noted, “It is well-established that unconscionability is a generally

applicable contract defense, which may render an arbitration provision unenforceable.” Id. (citing

Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir.2006) (en banc) (citing Doctor’s

Assocs., Inc. v. Casarotto, 517 U.S. 681, 686-87 (1996))). 

The court further noted, under California law, a contract provision is unconscionable only if

it is both procedurally and substantively unconscionable, but as California employed a sliding scale,

the greater presence of one would allow for the lesser presence of the other, and still support a court

finding a provision unconscionable. Shroyer, 498 F.3d at 981-982.

The court then noted, in 2003, it had twice held class arbitration waivers in contracts of

adhesion were procedurally and substantively unconscionable. Id. at 982 (discussing Ingle v. Circuit

City Stores, Inc., 328 F.3d 1165, 1176 (9th Cir. 2003) (employment contract); Ting v. AT&T, 319

F.3d 1126, 1150 (9th Cir. 2003) (telephone services contract)). It also said, in Ingle and Ting, it had

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10

relied heavily upon Szetela v. Discover Bank, 97 Cal.App.4th 1094, 118 Cal.Rptr.2d 862 (2002),

which found procedural unconscionability in the adhesive nature of a credit card services contract,

and substantive unconscionability in the imposition of a one-sided and oppressive class action

waiver provision. Shroyer, 498 F.3d at 976. 

The Ninth Circuit then noted the California Supreme Court had approved Szetela’s

reasoning, in 2005, when it held a class arbitration waiver unconscionable, in Discover Bank v.

Superior Court. Id. at 982. In Discover Bank, the “plaintiff alleged that the company had

misrepresented the date by which it needed to receive consumers’ payments in order to avoid

charging late payment fees.” Id. 

The California Supreme Court first stated: 

the [unconscionability] doctrine has both a procedural and a substantive element, the

former focusing on oppression or surprise due to unequal bargaining power, the latter

on overly harsh or one-sided results. 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. Substantively

unconscionable terms may take various forms, but may generally be described as

unfairly one-sided.

Id. at 982 (quoting Discover Bank, 36 Cal. 4th at 160).

This court then held while class action waivers were not per se unconscionable, the FAA

would not bar them from finding 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, 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

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///

property of another.” (Civ. Code, § 1668.) Under these circumstances, such waivers

are unconscionable under California law and should not be enforced.

Shroyer, 498 F.3d at 983, 983 n.5 (quoting Discover Bank, 36 Cal. 4th at 162).

As a result, the California Supreme Court found the Discover Bank class arbitration waiver

unconscionable. Shroyer, 498 F.3d at 982. In turn, applying the three Discover Bank elements of

adhesion, damages, and deception, the Ninth Circuit found Shroyer’s class arbitration waiver

unconscionable. Id. at 981, 983-84. In this case, applying the three Discover Bank elements to

AT&T’s class arbitration waiver demonstrates it too is unconscionable under California law.

B. Under Shroyer’s three-part test, AT&T’s class arbitration waiver is

unconscionable.

1. AT&T’s Arbitration Agreement is a contract of adhesion.

As Shroyer noted, “Under California law, ‘[a] contract of adhesion is defined as “a

standardized contract, imposed upon the subscribing party without an opportunity to negotiate the

terms.” ’ ” Id. at 983 (quoting Nagrampa, 469 F.3d at 1281 (quoting Flores v. Transam. HomeFirst,

Inc., 93 Cal.App.4th 846, 853, 113 Cal.Rptr.2d 376 (2001))). The Ninth Circuit found Shroyer’s

agreement with AT&T was adhesive where it used its substantially greater bargaining power, to set

the terms of the deal, in a take-it-or-leave-it fashion, and did not give Shroyer the opportunity to

negotiate. Id. at 983-84. Here, AT&T appears to concede, as it should, under the facts presented,

the Arbitration Agreement is adhesive under California law. Mem. at 9:5-10:1 (conceding this is its

only oppressive aspect, and it only generates a “minimal degree of procedural unconscionability”).

2. The setting involves a small amount of damages.

The Shroyer court noted in “Discover Bank, the plaintiff sought to recover for a $29 fee

charged to him for late payments and other finance charges.” Shroyer, 498 F.3d at 984. After

Discover Bank was decided, the California Appellate Court held claims for $200 or even for $1,000,

were “small amounts of damages” under the second part of the Discover Bank test. Id. (discussing

Cohen v. DirecTV, Inc., 142 Cal.App.4th 1442, 1452, 48 Cal.Rptr.3d 813 (2006) and Gatton v.

T-Mobile USA, Inc., 152 Cal.App.4th 571, 587, 61 Cal.Rptr.3d 344 (2007), respectively). Thus, in

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8 In so holding, the Ninth Circuit noted its conclusion was similar to that reached by district

judges in the Northern, Central and Southern Districts of California in at least ten other cases. See

Bradberry v. T-Mobile USA, Inc., No. 06-6567, 2007 WL 1241936, 2007 U.S. Dist. LEXIS 34826

(N.D. Cal. Apr. 27, 2007) (Wilken, J.); Winig v. Cingular Wireless, LLC, 06-4297, 2006 WL

2766007, 2006 U.S. Dist. LEXIS 73137 (N.D. Cal. Sept. 27, 2006) (Chesney, J.); Hoffman v.

Cingular Wireless, LLC, No. 06-1021, 2006 U.S. Dist. LEXIS 79067 (S.D. Cal. Oct. 26, 2006)

(Whelan, J.); Page v. Verisign, Inc., No. 06-0906 (S.D. Cal. Aug. 3, 2006) (Miller, J.); Herrington v.

Verisign, Inc., No.1915 (S.D. Cal. Aug. 3, 2006) (Miller, J.); Stern v. Cingular Wireless Corp., 453

12

Shroyer, the court had little problem finding $69.98 in damages also qualified as a “small amount of

damages” for this step of the test. Likewise, here, the Stieners’ claim for $114.95 qualifies as a

“small amount of damages” for purposes of the second part of the Discover Bank test.

3. The Stieners allege a scheme of deliberate cheating.

In Shroyer, the Ninth Circuit found plaintiff’s complaint plainly alleged AT&T had used its

superior bargaining power to carry out a scheme to deliberately cheat large numbers of consumers

out of individually small sums of money. Shroyer, 498 F.3d at 984. Specifically, Shroyer alleged to

increase profits, the merged entity deliberately induced thousands of pre-merger AT&T customers to

enter into new agreements by misrepresenting their services would be improved only if they

extended their contract terms. Id. “The gravamen of Shroyer’s complaint is [the merged entity]

undertook a fraudulent scheme, and, in fact, one of his causes of action is for fraud and deceit.” Id.

Nonetheless, the Shroyer court noted California courts do not require a cause of action or express

allegation of fraud, as long as the allegations would support finding it occurred. Id.

Here, however, the Stieners did plead fraudulent concealment. And, they alleged AT&T and

Apple deliberately induced hundreds of thousands, if not millions, of consumers to purchase iPhones

for $499 to $599, while intentionally hiding the fact they would be subject to annual batteryreplacement and related charges equal to around $115, or 19% to 23% of their purchase price. 

Rather clearly, AT&T used its superior bargaining power to carry out a scheme to deliberately cheat

large numbers of consumers out of individually small sums of money.

4. Conclusion

In Shroyer, the Ninth Circuit found “Because all three parts of the Discover Bank test are

satisfied, AT&T’s class arbitration waiver is both procedurally and substantively unconscionable,

and cannot be enforced.”8

 Id. For the same reasons, the Court finds here that AT&T’s class

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F.Supp.2d 1138 (C.D. Cal.2006) (Snyder, J.); Janda v. T-Mobile, USA, Inc., No. 05-3729, 2006 WL

708936, 2006 U.S. Dist. LEXIS 15748 (N.D. Cal. Mar. 17, 2006) (White, J.); Ford v. Verisign, Inc., No. 05-0819, 2006 U.S. Dist. LEXIS 88856 (Mar. 8, 2006) (Miller, J.) (discussing the court’s

December 19, 2005 order); Cervantes v. Pacific Bell Wireless, No. 05-1469, 2006 U.S. Dist. LEXIS

89198 (S.D. Cal. Mar. 8, 2006) (Miller, J.) (discussing the court’s January 10, 2006 order); Laster v.

T-Mobile USA, Inc., 407 F.Supp.2d 1181 (S.D. Cal.2005) (Sabraw, J.).

13

arbitration waiver in its Arbitration Agreement is both procedurally and substantively

unconscionable, and cannot be enforced.

C. Under Shroyer and other cases, AT&T’s two counter-arguments fail.

AT&T raises two counter-arguments to finding the class arbitration waiver in its Arbitration

Agreement is unconscionable, neither of which is availing.

1. The Stieners demonstrate more than a minimal showing of procedural

unconscionability.

In Discover Bank, the California Supreme Court held procedural unconscionability focuses

“on oppression or surprise due to unequal bargaining power.” Shroyer, 498 F.3d at 982 (quoting

Discover Bank, 36 Cal.4th at 160). AT&T makes three arguments alleging the Stieners have failed

to show an appreciable amount of oppression or surprise, and thus, under California’s sliding scale

test, they must make a “strong showing” of substantive unconscionability, which it argues they fail

to do, in a subsequent portion of its Points and Authorities. Mem. at 11:17-24. As the following

discussion shows, however, AT&T’s counter-arguments fail.

a. The lack of market alternatives for the iPhone demonstrates

additional procedural unconscionability.

AT&T first argues an adhesive contract, like its Terms of Service, by itself, without any

other evidence, merely demonstrates a “minimal degree of procedural unconscionability,” citing to

Gatton, 152 Cal.App.4th at 585. Mem. at 9:4-11. AT&T is partially correct, but did not provide the

full quote. Gatton held, the “use of a contract of adhesion establishes a minimal degree of

procedural unconscionability notwithstanding the availability of market alternatives.” Gatton, 152

Cal.App.4th at 355-56 (emphasis added). Thus, where there are no market alternatives, the use of

an adhesive contract will establish a greater degree of procedural unconscionability. 

Here, AT&T disingenuously argues an iPhone is merely a cell phone, ubiquitous in the

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28 9 It seems unlikely Apple would have sold 270,000 iPhones in the first 30 hours of release,

were it easily fungible with other mere cell phones.

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wireless communications marketplace. Mem. at 10:1-3. As Apple’s marketing materials make

clear, however, an iPhone “combines three amazing products—a mobile phone, a widescreen iPod

and a breakthrough Internet device—into one small, lightweight, handheld device with desktopclass email, web browsing, searching and Google Maps.” Docket No. 39, Ex. “4” at 1, col. 1, para.

1 (emphasis added) (“AT&T Plans for iPhone” pamphlet). Not only is the breakthrough iPhone

apparently unique among wireless products, and thus without market alternatives, the Stieners

purchased two when they were first available for purchase.9

 Thus, even were there market

alternatives available now, though the Court has no evidence to suggest this, it appears there were

none when the Stieners purchased theirs. Thus, on the iPhone’s uniqueness alone, the Stieners

clearly have shown an additional amount of procedural unconscionability.

b. The iPhone need not be a necessity for the Stieners to show

additional oppression.

AT&T’s second argument is the Stieners cannot show any additional procedural

unconscionability by oppression, because a cell phone is not a necessity. Mem. at 10:1-8. The

argument is moot, as the breakthrough iPhone’s uniqueness already suffices to show oppression

beyond the minimal established by AT&T’s adhesive contract. 

Nonetheless, the Court also notes the three cases on which AT&T bases its argument, see

Mem. at 10:3-8, do not appear to hold a showing of necessity is critical to a showing additional

oppression, in cases involving adhesive contracts. In the first case cited, Belton v. Comcast Cable

Holdings, LLC, 151 Cal.App.4th 1224, 60 Cal.Rptr.3d 631 (2007), the court’s unconscionability

analysis did not turn so much on “necessity,” as it did on market alternatives. The court noted FM

music was available to the legally blind plaintiff from free sources he possessed and used, like the

radio, and thus he need not purchase Comcast’s cable television to get it. Id. at 1229, 1246. Further,

Belton was issued on June 8, 2007, prior to Shroyer’s issuance on August 17, 2007, so the former

does not affect this Court’s reliance on the latter’s holding.

Likewise, AT&T’s second case, Provencher v Dell, Inc., 409 F.Supp.2d 1196 was issued in

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2006, well before the Ninth Circuit’s decision in Shroyer. In addition, the Court is reluctant to adopt

the district court’s analysis from Provencher for two reasons. First, Provencher admitted he was

fully aware of the arbitration provision at issue, before he even made his purchase, id. at 1198-99,

which as discussed infra in part II.C.1.c, is not the case here. Second, the court determined whether

there was “a small amount of damages” not by considering the plaintiff’s lone claim of about

$1,850, but by multiplying this amount by a possible class of 500,000 members, to find the result

was not “a small amount of damages.” Id. at 1202, 1202 n.7.

Lastly, AT&T’s third case, Riensche v. Cingular Wireless LLC, No. C06-1325Z, slip op.,

2007 WL 3407137 (W.D. Wash. Nov. 09, 2007), issued by a court inferior to the Ninth Circuit, only

held phone service was not a necessity for purposes of analyzing whether the plaintiff had purchased

it under compulsion or duress. Id. at *8. It did not consider unconscionability. Regardless of these

cases’ holdings, however, the fact an iPhone may not be a necessity does not bar the Stieners from

showing more than minimal procedural unconscionability, here.

c. The Stieners were surprised.

AT&T’s third argument is the Stieners cannot show any “surprise,” given the typefaces used

in the Terms of Services Agreement to notify them of the Arbitration Agreement, and the holding in

Gatton. Mem. at 10:9-11:16. In Gatton, plaintiffs purchased handsets from T-Mobile, which came

in boxes which were “sealed across the closing seam with a sticker that stated: ‘IMPORTANT [¶]

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.’ ” Gatton, 152 Cal.App.4th at 575-76 (emphasis added). 

In this case, in contrast, AT&T concedes at the time of an iPhone purchase, in a store, all a

consumer receives is a pamphlet [Docket No. 39, Ex. “1”] and a fact sheet [Docket No. 39, Ex. “2”]. 

Berinhout Decl. ¶ 7. AT&T does not claim these documents, totaling three pages, contain any

information regarding the Arbitration Agreement, and the Court found none. AT&T does claim a

Terms of Services booklet [Docket No. 39, Ex. “3”], is available in a store which sells iPhones, but

neither claims it is given to a consumer at purchase, nor explains the failure to provide one. 

Berinhout Decl. ¶ 8. 

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10 The Stieners make a number of allegations regarding the activation process, including that

the typefaces and the positioning used in the Terms of Service booklet are not duplicated on the

iTunes web site used for activation. Opp’n at 5:24-6:12. As a result, the Stieners claim the critical

arbitration waivers are not bolded but are buried in with other text, in a lengthy legal document. Id.

The Stieners did not verify their complaint nor attach a declaration or relevant exhibits to it. Thus,

the Court is unable to consider these unsworn statements in reaching its holding. 

Further, both the Stieners and AT&T direct the Court to www.youtube.com to view videos

regarding the activation process. Id. at 5:19-20; Docket No. 48 at 3 n.3 (Def.’s Reply Mem. of P. &

A. in Supp. of Mot. (“Reply”)). The Court reminds the parties they are responsible for providing the

Court any evidence they wish it to consider. The Court declines the parties’ invitation to go beyond

the filed pleadings and exhibits. 

Lastly, AT&T tries to ameliorate the lack of notice to the Stieners by noting they could have

returned their iPhones for a 90% refund. Reply at 3:7-11 (noting 10% restocking charge); Docket

No. 39, Ex. “2,” last para. AT&T, however, does not explain how this addresses “surprise,” nor

explain why consumers who decline to activate to preserve their legal right to a jury trial should pay

a 10% fee. Apple indicates its stores will waive the restocking charge for customers who reject

AT&T’s Terms of Service, though no mention is made of AT&T’s stores. Docket No. 55, Ex. “A”

¶¶ 2, 6. Not only is it unknown where the Steiners purchased their iPhones, Apple does not indicate

how the Stieners would have known about this waiver policy, which the Court notes, would not have

addressed their surprise.

16

///

AT&T spends a fair amount of effort explaining how the Stieners could not have been

surprised, due to the disclosures provided during the activation process, and the fact they had to

click on a box next to the statement, “I have read and agree to the AT&T Service Agreement.” 

Mem. at 10:22-11:16; Berinhout Decl. ¶ 9. AT&T is thus arguing there is no surprise where the

Stieners first received notice of the Arbitration Agreement, after they spent $1,200 plus tax on their

iPhones, took them home, then presumably out of their containers, and connected them to their

computer, not to review a lengthy legal document, but merely to activate them. Gatton does not

support this argument.10 Thus, the Stieners were surprised.

2. AT&T’s class arbitration waiver is substantively unconscionable as an

exculpatory clause.

AT&T’s second counter-argument is its “unprecedented” revised Arbitration Agreement

prevents the class arbitration waiver from being substantively unconscionable, as AT&T’s revisions

were designed to address the defects in its prior class arbitration waiver, invalidated by the Ninth

Circuit, in Shroyer. Mem. at 11:27-14:5. Examining the Premium and the Attorney Premium,

however, and comparing how AT&T’s Arbitration Agreement and a class action would allow

iPhone users to dispute the $114.95 in battery-changing and related charges, shows AT&T’s class

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arbitration waiver operates as an exculpatory clause, in violation of Shroyer.

a. The Ninth Circuit’s invalidation of AT&T’s prior class arbitration

waiver, in Shroyer.

In Shroyer, AT&T argued its then existing class arbitration waiver was:

not substantively unconscionable because, unlike the waiver in Discover Bank, it

does not operate to “insulate a party from liability that otherwise would be imposed

under California law,” or exempt [AT&T] “from responsibility for [its] own fraud, or

willful injury to the person or property of another.” 

Shroyer, 498 F.3d at 986 (quoting Discover Bank, 36 Cal.4th at 161). 

AT&T claimed this was so, because (1) it paid the full cost of arbitration, unless the

petitioner filed a frivolous claim as determined under the standards of Rule 11(b), and (2) if the

petitioner recovered an award equal to or greater than their demand, then they received attorney’s

fees. Shroyer, 398 F.3d at 986. As a result, AT&T alleged its arbitration clause did not deter

customers from arbitrating individual small-value claims and did not insulate itself from liability. 

Id.

The Ninth Circuit rejected this reasoning, holding:

[AT&T’s] attempt to distinguish Discover Bank based on the availability of

attorneys’ fees and arbitration costs is without merit. The California Supreme Court

in Discover Bank rejected “the rationale . . . that the potential availability of attorney

fees to the prevailing party in arbitration or litigation ameliorates the problem posed

by such class action waivers.” 36 Cal.4th at 162, 30 Cal.Rptr.3d 76, 113 P.3d 1100

(citations omitted). As the court reasoned, “[t]here is no indication . . . that, in the

case of small individual recovery, attorney fees are an adequate substitute for the

class action or arbitration mechanism.” Id. This rationale applies with equal force to

arbitration costs, which are almost always far less than attorneys’ fees. 

Shroyer, 498 F.3d at 986 (footnote omitted).

The Court continued:

Contrary to [AT&T’s] contention, the court was concerned that when the potential for

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individual gain is small, very few plaintiffs, if any, will pursue individual arbitration

or litigation, which greatly reduces the aggregate liability a company faces when it

has exacted small sums from millions of consumers. See id. at 158-62, 30

Cal.Rptr.3d 76, 113 P.3d 1100. It did not suggest that a waiver is unconscionable

only when or because a plaintiff in arbitration may experience a net loss (including

attorneys’ fees and costs).

Shroyer, 498 F.3d at 976.

The Ninth Circuit concluded, because AT&T “has failed to distinguish its class arbitration

waiver from the waiver in Discover Bank, we hold that the former is unconscionable and

unenforceable under California law.” Id.

b. AT&T’s new class arbitration waiver insulates it from liability,

and thus does not survive a Shroyer analysis.

In order for AT&T’s new class arbitration waiver to survive an analysis under Shroyer, it

must address the Ninth Circuit’s concern that “when the potential for individual gain is small, very

few plaintiffs, if any, will pursue individual arbitration or litigation, which greatly reduces the

aggregate liability a company faces when it has exacted small sums from millions of consumers.” In

other words, it needs to show its Arbitration Agreement functions as well as a class action would,

such that it has not insulated itself from hundred of thousands, if not millions, of iPhone users

seeking recovery of the hidden $114.95 in annual battery-changing and related charges. 

Towards this end, AT&T argues, “In light of the opportunities for ‘individual gain’ that are

built into [AT&T’s] arbitration provision,” “[AT&T] has not immunized itself from liability

because” there are “inducements for customers to pursue their claims in arbitration and for lawyers

to represent” them. Mem. at 13:16-14:1. Further, it alleges it has an inducement to settle quickly

before arbitration, or risk paying thousands of dollars in Premium and Attorney Premium. Id.

at 14:1-5. Lastly, it claims by allegedly reducing the cost to file an individual claim, it has created a

“market for fair settlement.” Id. at 14:11-13. AT&T thus concludes its class arbitration waiver

cannot operate as an exculpatory clause shielding it from liability. Id. at 14:7. Examining the

parties’ arguments regarding the Premium, the Attorney Premium, and the “market for fair

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settlement,” however, it appears AT&T’s class arbitration waiver greatly reduces the aggregate

liability it otherwise would face due to exacting “small sums from millions of consumers.” 

i. The Premium is an insufficient inducement for individuals

to sue, such that the class arbitration waiver operates to

immunize AT&T from liability from claims suitable for

class action.

The most challenging problem facing AT&T, in demonstrating its Arbitration Agreement is a

fair substitute for a class action, is proving that hundreds of thousands, if not millions, of AT&T

consumers across the country have the time, resources, or inclination to individually dispute the

$114.95 in annual charges. Towards this end, AT&T claims the Premium and the Attorney

Premium would induce them to do so. 

In response, the Stieners argue this “ ‘incentive’ argument ignores the critical fact that these

incentives are entirely illusory: they evaporate entirely if AT&T offers the plaintiff a ‘settlement

payment’ equal to his or her loss. Where the amount in dispute is predictably small, . . . the

incentives no longer apply,” and the $114.95 case remains a $114.95 case. Opp’n at 9:21-10:6. 

AT&T counters:

Plaintiffs’ beef, in short, is that [AT&T’s] provision makes satisfaction of an

individual consumer’s claim too likely—i.e., that customers will not be motivated to

pursue disputes against [AT&T] if those claims are almost certain to be met with

offers of payment in full. That argument makes no sense: Customers will be more

likely—not less—to make the minimal effort required to submit a notice of dispute

form in light of the incentives [AT&T] has to provide them with “‘settlement

payment[s]’ equal to [their] loss.”

Reply at 6:18-24.

AT&T has not only failed to respond to the Stieners’ argument, it has supported it. AT&T

argues consumers would be more likely to make “the minimal effort required” to dispute the $114.95

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11 Were AT&T to “almost certainly” settle in full each demand for the $114.95 in charges, then

arguably it should simply reimburse all AT&T consumers the $114.95 in charges, whether they

requested reimbursement or not, a result the Stieners seek here via class action.

12 Of course, the Court notes, this is substantially less than the California Unruh Act’s statutory

damages of $25,000 for civil rights violations. See Cal. Civ. Code § 52(b)(2).

20

in charges, even if their “claims are almost certain to be met with offers of payment in full.”11 The

Stieners, however, persuasively argue that AT&T need not settle in full with all or most plaintiffs,

but need only do so with a certain percentage of plaintiffs, denying them the Premium. At some

percentage point, other AT&T consumers, who have not yet sought arbitration, would believe the

only likely potential recovery available through arbitration would be the $114.95, but not the

Premium. Without the Premium as an inducement to arbitrate, these consumers would only make

the allegedly minimal effort to arbitrate, if they had the time, resources, or inclination to seek the

$114.95, by itself. AT&T’s key-stone argument in this matter, however, is the Court should not

invalidate its class arbitration waiver under Shroyer, because the Premium would induce consumers

to arbitrate disputes over small amounts of damages. The Stieners argue persuasively, however, that

as a practical matter the Premium is illusory.

AT&T has two additional counter-arguments to the Stieners. First, AT&T claims the

Premium exceeds statutory damage awards of $1,000 or less, set by various state or federal statues,

such as the Fair Credit Reporting Act, 15 U.S.C. § 1681n, or the California Disabled Persons Act,

section 54.3(a) of the California Civil Code. Mem. at 13:2-8.12 The Stieners do not respond to this

specific argument. The Court merely notes these statutes appear designed for actions brought by

individuals or a class, but do not appear designed to supplant the latter, which is AT&T’s goal here: 

to demonstrate how its Arbitration Agreement may effectively obviate the need for a class action, a

question to which these statutes do not speak.

AT&T’s second argument is its Premium provides a higher recovery than “the typical

incentive payments awarded to class representatives as part of court-approved class settlement

agreements.” Mem. at 13:8-15 (citing Theodore Eisenberg & Geoffrey P. Miller, Incentive Awards

to Class Action Plaintiffs: An Empirical Study, 53 UCLA L. Rev. 1303, 1333 & tbl. 5 (2006)

(median incentive award in consumer and consumer credit cases is $2,089 and $1,045, respectively). 

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13 AT&T attempts to provide some statistics indicating the Arbitration Agreement works: In

September 2007, its customer service personnel provided $119 million in manual credits, and in

some unspecified prior 12-month period, they provided $1 billion in manual credits. Berinhout

Decl. ¶ 16. Between January 1 and October 31, 2007, AT&T received over 500 notices of dispute,

id. ¶ 20, and in 2005 and 2006, it was sued “about 850” times in small claims court nationwide, id. ¶

21. Unfortunately, AT&T provides no meaningful context in which the Court can assess these

figures for any useful purpose. Thus, the Court can only guess if these figures are high or low, or if

they indicate consumers are pleased with AT&T, or ignorant of their rights and remedies, or

somehow frustrated in vindicating them.

21

Again, the Stieners do not specifically address this argument. The Court merely notes the operative

comparison here is between how the Arbitration Agreement and a class action might resolve a

dispute between all iPhone consumers and AT&T. In this regard, AT&T has not presented any

evidence that all iPhone consumers would recover more, on average, if the Court let the Arbitration

Agreement stand rather than allowing the Stieners’ class action to proceed. Thus, having considered

the parties’ arguments regarding the Premium, it appears an insufficient inducement for individuals

to pursue arbitration or a small claims action, such that AT&T’s class arbitration waiver operates to

immunize it from liability from claims amendable to class action.13

ii. Shroyer and Discover Bank rejected adjustments to the

attorneys’ fees provisions of class arbitration waivers, as a

means of addressing unconscionability.

The Attorney Premium does little to nothing to induce any attorney to take on a $114.95

dispute. Quite simply, it is unclear that such a case would generate significant fees, as it would

ostensibly take few billable hours to work up. Moreover, given that many plaintiffs lawyers work

on contingency, they would more likely focus their efforts on cases with a higher potential recovery. 

AT&T appears to concede this by noting, “under [AT&T’s] arbitration provision, most customers

will likely be able to recover most or all the amount in dispute without incurring any attorneys’ fees

at all . . . .” Reply at 7:3-4 (emphasis in original).

The Attorney Premium is also likely to do little or nothing to induce any attorney to get

involved, because the entire Premium structure appears illusory, for the reasons discussed supra in

part II.C.2.b.i. Possibly anticipating this problem, AT&T argues, “customers who are aided by

counsel in pursuing their disputes are likely to receive settlement offers that include reasonable

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attorneys’ fees.” Id. at 7:7-8 (emphasis added). In support of this statement, AT&T does not point

to the Attorney Premium, but instead claims that prior to a notice of arbitration, AT&T “generally

responds . . . with a written settlement offer[,]” that “include[s] a reasonable amount of attorneys

fees . . . whenever a customer represented by counsel has included a request for attorneys’ fees . . . .” 

Docket No. 49 ¶¶ 2, 4 (Reply Decl. of Neal S. Berinhout in Supp. of Def.’s Mot.). AT&T notably

fails to indicate, however, how many customers are represented by counsel, or what the terms

“generally” or “reasonable amount” mean. 

As an additional argument, AT&T claims customers who sue under fee-shifting statutes, like

the Stieners, may claim attorneys’ fees, as the Arbitration Agreement allows prevailing parties to

seek fees under prevailing law, as long as they do not exceed the Attorney Premium. See Reply at 7

n.5. Problematically for AT&T, this argument fails, as the Stieners did not sue under a fee-shifting

statute. They sued under California’s Unfair Competition Act, section 17200 et seq. of the

California Business and Professions Code, which does not provide for attorneys’ fees. Under

California law, attorney’s fees are available only by contract, statute, or law. Cal. Code Civ. Proc.

§ 1033.5(a)(10). As the Arbitration Agreement does not provide for attorneys’ fees, only that a

party may seek them under applicable law, it is unclear what contract, statute, or law would provide

fees to the Stieners were the Attorney Premium unavailable to them.

Thus, it is unclear the Attorney Premium or the attorneys’ fees provisions of AT&T’s

Arbitration Agreement would significantly increase the amount of attorney participation in tiny

claims arbitrated against AT&T. As a result, the agreement is not an effective substitute for a class

action. As the California Supreme Court has noted, what drives and makes class actions effective is

the legal representation available, no doubt driven by the potential for lucrative compensation. Thus

it held in Discover Bank, “in the case of small individual recovery, attorney fees are [not] an

adequate substitute for the class action or arbitration mechanism.” Thus, the Attorney Premium in

AT&T’s Arbitration Agreement waiver does not mitigate the exculpatory nature of the class action

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14 This analysis also applies to AT&T’s provision in the Arbitration Agreement not to seek

costs and fees. See Shroyer, 498 F.3d at 986 (“[A] waiver is [not] unconscionable only when or

because a plaintiff in arbitration may experience a net loss (including attorneys’ fees and costs).”).

15 The Arbitration Agreement allows AT&T to seek a global settlement with every arbitrating

iPhone consumer, but only if each and every one of them agrees to do so. Docket No. 39, Ex. “3”

at 15 ¶ 6 (TOS booklet). Ignoring for the moment that this strategy would fail to cover nonarbitrating iPhone consumers, this “single veto” provision makes the Arbitration Agreement less

efficient than a class action.

16 The Court expresses some concern that rather than establishing a “fair market,” the Premium

appears to insert a Monte Carlo type aspect into the arbitration process, in that consumers are being

wooed by the promise of a bonus for taking a chance on arbitration, rather than taking no action at

all, or rather than suing in small claims court.

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waiver.14

///

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iii. It is not clear that the Arbitration Agreement creates a fair

market for settlement, which would operate as efficiently as

a class action would.

In order for AT&T to prevail, it must demonstrate it is more efficient for hundreds of

thousands, if not millions, of iPhone users to individually dispute the $114.95 in charges, through

arbitration or small claims courts, rather than in one class action.15 AT&T claims the Arbitration

Agreement reduces the costs of bringing an individual claim, such that a market for fair settlement is

created.16 Mem. at 14:11-13. The Stieners argue a class action is more efficient for the courts,

consumers, and benefits competition and society as a whole, by discouraging unfair and fraudulent

conduct by allowing its redress in one action, rather than in millions of individual actions. Opp’n at

10:10-14. AT&T counters the Arbitration Agreement reduces the cost of disputes, which will lead

to lower prices for AT&T’s goods and services. Reply at 8:15-24. AT&T also argues that by

exchanging their right to proceed as a class, its consumers make a fair tradeoff. Id. at 8:10-15. The

Stieners question AT&T’s ability to make a fair exchange here, as AT&T is unlikely to file a class

action against its own consumers. See id. at 11:11-25 (discussing Ting). Considering the parties’

arguments, AT&T has failed to establish its Arbitration Agreement is as efficient a dispute

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17 The Court notes its unconscionability analysis here is not focused on the members of some

putative class, but only on the Stieners, whether as named plaintiffs or nameless members of a class

action. Thus, while the Court might discuss the efficiency of the Arbitration Agreement, versus that

of a class action, in societal terms, its ultimate concern is whether it is unconscionable to deprive the

Stieners of the right to bring the force of the arguably more efficient class action to bear on AT&T,

to vindicate their rights, as well as the rights of all other iPhone users, regarding the $114.95 in

charges.

18 AT&T does not explain why it refers to its “customer care department” as the “Office of the

President.”

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resolution mechanism as class actions are.17

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AT&T’s Associate General Counsel does state:

Many disputes between [AT&T] and its customers are resolved by means of a call or

e-mail to [AT&T’s] customer care department, which is known at [AT&T] as the

Office of the President, making it unnecessary for the customer to file a Notice of

Dispute. I have instructed personnel in the Office of the President to contact the legal

department (and me in particular) whenever they become aware of a pattern of

similar complaints so that I can review the complaints and determine whether any

changes to [AT&T’s] practices are necessary.

Berinhout Decl. ¶ 15.18

AT&T has provided insufficient evidence for the Court to find this adequately substitutes for

providing its consumers with a right of class action. Thus, in reviewing the arguments on this issue,

the Court is not convinced the Arbitration Agreement creates a fair market for settlement, which

would operate as efficiently as a class action would.

c. Conclusion

 Examining the parties’ arguments regarding the Premium, the Attorney Premium, and the

“market for fair settlement,” AT&T’s class arbitration waiver appears to operate as an exculpatory

clause, greatly reducing the aggregate liability it otherwise would face due to exacting “small sums

from millions of consumers.” As such, the Arbitration Agreement does not operate as efficiently as

a class action would to address iPhone users’ disputes over the $114.95 in charges. Thus, under

Shroyer, the class arbitration waiver is substantively unconscionable.

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19 Having voided the Arbitration Agreement in its entirety, the Court has no need to address the

Stieners one-sentence argument that in the event their claims at law are preempted, their injunctive

claims are not arbitrable in California. See Opp’n at 16:21-23.

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3. Conclusion

Under California’s sliding scale, the Stieners have shown an adhesive contract, a lack of

market alternatives, and surprise, demonstrating procedural unconscionability. Likewise, they have

shown substantive unconscionability by showing AT&T’s class arbitration waiver operates as an

exculpatory clause. Thus, under Shroyer, the class arbitration waiver is unconscionable.

///

4. As goes the class arbitration waiver, so goes the Arbitration Agreement.

AT&T’s class arbitration waiver provides, “If this specific provision is found to be

unenforceable, then the entirety of this arbitration provision shall be null and void.” Docket No. 39,

Ex. “3” at 15 ¶ (6) (TOS booklet). As the Court stated in Shroyer:

Because [AT&T] has failed to distinguish its class arbitration waiver from the

waiver in Discover Bank, we hold that the former is unconscionable and

unenforceable under California law. In addition, because the class arbitration waiver

is unenforceable, we must also hold that the entire arbitration clause is void. 

Shroyer, 498 F.3d at 986.

For the same reasons, the Court finds AT&T’s class arbitration waiver unconscionable and

unenforceable under California law, rendering its Arbitration Agreement void.19

III. The FAA does not preempt the application of California’s unconscionability law to

AT&T’s class arbitration waiver.

AT&T argues the FAA preempts the application of California’s unconscionability law to its

class arbitration waiver. Mem. at part III. The purpose of the FAA is to enforce arbitration

agreements, “save upon such grounds as exist at law or in equity for the revocation of any contract.” 

As 9 U.S.C. § 2 states:

A written provision in any maritime transaction or a contract evidencing a transaction

involving commerce to settle by arbitration a controversy thereafter arising out of

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such contract or transaction, or the refusal to perform the whole or any part thereof,

or an agreement in writing to submit to arbitration an existing controversy arising out

of such a contract, transaction, or refusal, 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 (emphasis added).

///

In Shroyer, the Ninth Circuit found the FAA did not preempt applying California’s

unconscionability law to arbitration agreements. Shroyer, 498 F.3d at 987. In so holding, the court

engaged in a detailed analysis demonstrating conclusively that California’s unconscionability law is

“a generally applicable contract defense” at law, and not a state law which specifically targets

arbitration agreements. Id. at 981, 987-88. In this regard, the Ninth Circuit specifically concluded

that allowing unconscionable arbitration provisions to stand would not further the FAA’s purpose of

fostering arbitration. Id. at 988-93. As AT&T correctly notes, the Court is bound by Shroyer. 

Mem. at 15:11-12.

AT&T does advance one argument in favor of preemption, to which the Court now turns. 

AT&T argues because its class arbitration waiver is conscionable, any attempt by the Court to

invalidate it on the grounds of unconscionability would, in substance, amount to a covert act to

invalidate it solely because it is part of an arbitration agreement. Mem. at 15:15-17:16. That

improperly stretching the definition of “unconscionability” to reach its class arbitration waiver

would not be applying it as a generally applicable contract defense, in violation of the FAA. Id. 

AT&T’s reasoning is flawed for two reasons. First, in part II, supra, the Court provided a

detailed analysis as to why AT&T’s class arbitration waiver is unconscionable. Thus, AT&T’s

assumption that its class arbitration waiver is conscionable, is incorrect, mooting its argument. 

Second, as discussed in part II, supra, the Court did not invalidate the class arbitration waiver

because it was part of an arbitration agreement. The Court invalidated it because under California’s

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20 AT&T also asserted a second argument, buried in a dense, 26-line, single-spaced footnote,

for the “purposes of preserving this issue for possible Supreme Court review.” Mem. at 9 n.6. If

AT&T truly wished to place this issue squarely before the Court, it should have fully briefed it in the

body of its Points and Authorities. Failing to do so does not preserve a “throw away” argument for

review as it has not been placed before this Court. Given that AT&T relegated this point to a

footnote which arguably circumvents the local rule page limits, it has in essence acknowledged this

issue is irrelevant for purposes of this motion. Because AT&T did not consider the issue sufficiently

meritorious or pertinent to invest any time in developing it, the Court invests none of its time in

addressing it.

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generally applicable unconscionability law, the waiver operated in an unconscionable manner.20

///

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CONCLUSION

Accordingly:

(1) Defendant AT&T Mobility, LLC’s Motion to Compel Arbitration and to Dismiss

Claims Pursuant to the Federal Arbitration Act [Docket No. 38] is DENIED;

(2) The Court’s order [Docket No. 44] granting AT&T Mobility, LLC’s Motion to Stay

Its Obligations under the Court’s Initial Scheduling Order Pending Resolution of Its

Soon-To-Be-Filed Motion to Compel Arbitration [Docket No. 33] is VACATED; and

(3) The deadlines set by the Court’s Order Setting Initial Case Management Conference

and ADR Deadlines [Docket No. 2] are RESET as follows:

Date Event Governing Rule

03/27/2008 Last day to:

! meet and confer re: initial disclosures, early FRCivP_26(f) & ADR

settlement, ADR process selection, and discovery L.R.3-5

plan

! file Joint ADR Certification with Stipulation to Civil_L.R. 16-8

ADR Process or Notice of Need for ADR Phone 

Conference

04/03/2008 Last day to file Rule 26(f) Report, complete initial FRCivP 26(a) (1)

disclosures or state objection in Rule 26(f) Report and Civil _L.R . 16-9

file Case Management Statement per attached Standing

Order re Contents of Joint Case Management Statement

(also available at http://www.cand.uscourts.gov)

04/24/2008 INITIAL CASE MANAGEMENT CONFERENCE Civil _L.R. 16-10

at 2:45 p.m. The parties shall meet and confer prior to 

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the conference and shall prepare a joint Case 

Management Conference Statement which shall be filed 

no later than ten (10) days prior to the Case Management 

Conference that complies with the Standing Order for all 

Judges of The Northern District of California and the 

Standing Order of this Court. Plaintiff(s) shall be 

responsible for filing the statement as well as for arranging 

the conference call. All parties shall be on the line and 

shall call (510) 637-3559 at the above indicated date and time. 

IT IS SO ORDERED.

March 12, 2008 _________________________________

Saundra Brown Armstrong 

United States District Judge

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