Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-05463/USCOURTS-cand-3_07-cv-05463-2/pdf.json

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

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

AT&T MOBILITY II, LLC, a Delaware

limited liability company,

Plaintiff,

 v.

CAROLYN PESTANO, an individual,

Defendant. /

AND RELATED COUNTERCLAIMS.

 /

No. C 07-05463 WHA

ORDER (1) DENYING

PLAINTIFF’S MOTION TO

COMPEL ARBITRATION

AND (2) GRANTING

DEFENDANT’S REQUEST FOR

RELIEF UNDER RULE 56(F)

INTRODUCTION

In this dealer dispute, the company sued the dealer’s shareholder on a guaranty. 

This provoked counterclaims. The company’s instant motion now seeks to continue its action

in federal court but to steer the counterclaims into arbitration via a motion to compel arbitration. 

This order holds that the arbitration clause in question is unconscionable and should not be

enforced. All motions by the company are DENIED. The dealer’s request for relief under Rule

56(f) is GRANTED.

STATEMENT

Plaintiff AT&T Mobility II, LLC (AT&T) is a Delaware company formerly known as

AT&T Wireless Services, Inc. and Cingular Wireless II, LLC. Defendant Carolyn Pestano, a

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 AT&T was known as AT&T Wireless Services, Inc. and Cingular Wireless II, LLC during some of

the time periods discussed herein. For the sake of clarity, however, this order uses the name AT&T throughout.

2

Washington resident, was the CEO and sole shareholder of Viva Wireless, Inc. (“Viva”), a

California corporation and authorized dealer that sold AT&T wireless products and services in

kiosks in Northern Californian shopping malls. 

AT&T and Viva’s relationship dates back to 2001 when the companies entered into a

dealer agreement.1

 This agreement included an explicit arbitration clause. In January of 2006

the companies superseded the 2001 agreement with a second dealer agreement, which also

included an explicit arbitration clause: “all claims (including counterclaims and cross-claims

and also including claims based on tort or other legal theories) and disputes between Dealer

and Company must be resolved by submission to binding arbitration” (Miguel Decl. Exh. B). 

The 2006 dealer agreement included a 120-day notice provision, a 180-day limitations period, a

confidentiality provision, a fee-splitting provision, and a provision that allowed AT&T, but not

Viva, to assign its rights to a third party.

In February of 2006, the companies further amended the terms of their relationship

through the “SMF Release,” which altered the fees due to Viva for subscriber accounts

activated prior to February 1, 2006. Pursuant to this release, Viva agreed to surrender rights to

subscriber management fees in exchange for which AT&T agreed to pay Viva a lump sum

payment of $193,152.64 and monthly payments of $22,655.45 for 24 months. The SMF

Release stated that “[a]ny disputes related to this 2/1/06 SMF Release between the parties must

be resolved under the dispute provisions of the Dealer Agreement” (Miguel Decl. Exh. C). 

In October of 2006, AT&T agreed to advance Viva a lump sum of $250,000 pursuant to

the Advance Payment Agreement (“APA”) to help Viva expand its operations. The advance

payment was to be repaid on a monthly basis as AT&T withheld payments due to Viva under

the SMF Release. The APA did not include explicit language concerning arbitration but it

referenced the earlier agreements between the parties as follows (Miguel Decl. Exh. D):

The APA shall be construed and interpreted in conjunction with

the Dealer Agreement and the 2/1/06 SMF Release. To the extent

that this APA revises the terms of the Agreement or the 2/1/06

SMF Release, it shall be treated as an amendment to those

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respective documents. Similarly, to the extent that this APA adds

to the terms of the Dealer Agreement or the 2/1/06 SMF Release,

it shall be treated as a supplement to those respective documents. 

If a conflict exists between the terms of the Dealer Agreement, the

2/1/06 SMF Release and this APA, the terms of this APA shall

control.

Along with the APA, Defendant Pestano executed a “Dealer Principal Personal Guaranty” in

which she agreed to personally guarantee “payment and/or Viva’s obligations under the Advance

Payment Agreement” (Miguel Decl. Exh. D). The guaranty, which was included as Exhibit B of

the APA, included the following language (ibid.):

In the event GUARANTOR fails to make any payment due

COMPANY when due, or to perform any other obligation

guaranteed by GUARANTOR hereunder in a timely manner,

GUARANTOR shall be deemed in default under this Guaranty,

and COMPANY may, in addition to any other remedies available

to COMPANY at law or in equity, immediately declare all

amounts due and owing COMPANY by GUARANTOR to be

immediately due and payable.

The parties dispute who terminated the business relationship. AT&T alleges that Viva

informed AT&T that it was “ceasing business” on or about April 5, 2007 (Compl. ¶ 15). 

According to AT&T, $130,000 remained outstanding under the APA; Pestano disputes this

assertion.

In September of 2007, AT&T filed suit against Pestano in Alameda County Superior

Court, asserting claims under the guaranty. Pestano removed to federal court under

28 U.S.C. 1332 and filed a responsive pleading, which asserted the following affirmative

defenses (Ans. 6):

1. AT&T's claims are barred by offset of amounts due to

[Viva] under the SMF Release.

2. The Advance Payment Agreement (and the guaranty) is

unenforceable by reason of mutual mistake.

3. AT&T is barred by reason of its unclean hands from

enforcing the Advance Payment Agreement (and the

guaranty).

4. AT&T is barred by reason of its own inequitable conduct

from enforcing the Advance Payment Agreement (and the

guaranty).

5. The personal guaranty and Advance Payment Agreement

are unenforceable by reason of lack of consideration.

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Pestano’s responsive pleading also included the following counterclaims, which Pestano claims

Viva assigned to her (Ans. 12–16):

1. Breach of contract arising from an alleged failure to pay amounts

due under the SMF Release;

2. Breach of contract arising from an alleged failure to pay amounts

owed under the 2001 dealer agreement;

3. Breach of contract arising from an alleged failure to return excess

reserves and to account to Viva under the 2006 dealer agreement;

4. Breach of the duties of good faith and fair dealing, which were

implied in the 2001 and 2006 dealer agreements;

5. Negligent misrepresentation concerning the APA and the

guaranty;

6. Unfair competition under Section 17200 of the California

Business and Professional Code.

AT&T subsequently filed this motion to compel arbitration of Pestano’s counterclaims. 

According to AT&T, its motion to compel arbitration “does not purport to affect Pestano’s

affirmative defenses” (Reply Br. 15). AT&T also filed a motion to dismiss Pestano’s first,

second, fifth, and sixth counterclaims on the merits (numbered as above).

ANALYSIS

1. LEGAL STANDARD.

Plaintiff’s motion to compel arbitration is governed by the Federal Arbitration Act

(“FAA”). A district court’s role under the FAA is limited to determining (1) whether a valid

agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute

at issue. Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010, 1012 (9th Cir. 2004). 

If the district court determines that a valid arbitration agreement encompasses the dispute, then

the FAA requires the court to enforce the arbitration agreement in accordance with its terms. 

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 Internal quotations have been omitted unless otherwise stated.

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Ibid. “Any doubts concerning the scope of arbitrable issues should be resolved in favor of

arbitration.” Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 720 (9th Cir. 1999).2

To determine whether a valid, enforceable arbitration agreement exists, a district court

must look to state law. Lowden v. T-Mobile USA, Inc., 512 F.3d 1213, 1217 (9th Cir. 2008)

(“We apply state-law principles that govern the formation of contracts to determine whether a

valid arbitration agreement exists.”); see also Wright, Miller and Cooper, Federal Practice &

Procedure: Jurisdiction § 3569 (3d ed. 2007). Here, both parties have briefed and argued the

issues solely under California law. Accordingly, this order will take California law as

controlling, just as the parties have done. See Nagrampa v. MailCoups, Inc., 469 F.3d 1257,

1267 (9th Cir. 2006).

The 2001 and the 2006 dealer agreements both included arbitration clauses. Because the

2006 dealer agreement purported to supersede the 2001 dealer agreement, this order concludes

that the 2006 arbitration clause controls. The parties dispute whether or not the SMF Release

and the APA incorporated this arbitration clause. Because this order holds that the arbitration

clause is unenforceable regardless, this order declines to reach the issue. 

3. UNCONSCIONABILITY OF THE AT&T ARBITRATION AGREEMENT.

To be deemed unenforceable under California law, an arbitration agreement must be both

procedurally and substantively unconscionable. See Armendariz v. Found. Health Psychcare

Servs., Inc., 24 Cal. 4th 83, 99 (2000); see also Ting v. AT&T, 319 F.3d 1126, 1148 (9th Cir.

2003) (applying California law). The California Supreme Court has explained that the inquiry

into procedural validity focuses on “oppression or surprise due to unequal bargaining power”

while the substantive inquiry focuses on “overly harsh or one-sided results.” Armendariz, 24

Cal. 4th at 114. See also Ting, 319 F.3d at 1148. The validity of an agreement is judged on a

“sliding scale:” “the more substantively oppressive the contract term, the less evidence of

procedural unconscionability is required to come to the conclusion that the term is

unenforceable, and vice versa.” Armendariz, 24 Cal. 4th at 114. 

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No court decision has been found that reviews the particular AT&T arbitration agreement

at issue here.

A. Procedural Validity. 

Under California law, procedural unconscionability arises from “an inequality of

bargaining power that results in no real negotiation and an absence of meaningful choice.” 

Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846, 853 (2001) (citing A & M

Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486 (1982)). An adhesion contract is

generally considered to be procedurally unconscionable. The Ninth Circuit, applying California

law, has explained that “[a] contract is procedurally unconscionable if it is a contract of

adhesion, i.e., a standardized contract, drafted by the party of superior bargaining strength, that

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

Ting, 319 F.3d at 1148; see also Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846,

853 (2001) (“A finding of a contract of adhesion is essentially a finding of procedural

unconscionability.”). 

Even though this case arises in the franchise rather than the consumer context, and it does

not involve the “necessities of life,” the Ninth Circuit has explained that “California courts have

long recognized that franchise agreements have some characteristics of contracts of adhesion

because of the vastly superior bargaining strength of the franchisor.” Nagrampa, 469 F.3d

at 1282; see also Postal Instant Press, Inc. v. Sealy, 43 Cal. App. 4th 1704, 1715–16 (1996)

(“Although franchise agreements are commercial contracts they exhibit many of the attributes of

consumer contracts.”).

Viva argues that it had no choice but to enter into the 2006 agreement and that the

agreement, therefore, was an adhesion contract. By 2006, Viva had been an AT&T dealer for

five years; the company stood to “lose its existing investment in the relationship” if it did not

enter into the 2006 agreement (Opp. 11). In her declaration, Pestano asserted that “I did not have

an opportunity to negotiate the provisions of the 2006 dealer agreement, including in particular

the dispute resolution provisions” (Pestano Decl. ¶ 7). AT&T does not appear to contest

Pestano’s argument that the 2006 dealer agreement was an adhesion contract; rather, AT&T

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argues that “[c]ontracts of adhesion are not per se procedurally unconscionable or even,

‘oppressive’” (Reply Br. 6). AT&T argues that the arbitration clause is not oppressive because

other options existed for Viva. It could have become a dealer for another wireless provider or,

alternatively, Viva could have “remained a dealer under the [2001 agreement], as some dealers

chose,” according to AT&T (ibid.). 

This order concludes that the arbitration agreement was procedurally unconscionable. 

AT&T’s contention that Viva could have become a dealer for another wireless provider is

unrealistic. So too is its contention that Viva could have elected to remain a dealer under the

2001 agreement. The termination provision of the 2001 agreement, which allowed either party

to terminate without cause (Miguel Decl. Exh. A), suggests that Viva in fact had no “meaningful

choice” but to enter into the 2006 agreement. Notably, AT&T does not assert that Viva had the

option of negotiating the terms of the 2006 agreement. The unequal nature of the parties’

bargaining positions is clear; the 2006 dealer agreement was a take-it-or-leave-it adhesion

contract. The 2006 dealer agreement was “oppressive” and therefore procedurally

unconscionable.

B. Substantive Validity.

To be substantively valid, an arbitration agreement must possess a “modicum of

bilaterality.” Armendariz, 24 Cal. 4th at 117. “[T]he determinative question is whether the

contract terms are so harsh or one-sided that they lack basic fairness.” Abramson v. Juniper

Networks, Inc., 115 Cal. App. 4th 638, 658 (2004). Pestano argues that five different provisions

of the arbitration agreement within the 2006 dealer agreement are substantively unconscionable. 

(1) The 120-Day Notice Provision and the 180-Day Limitation.

The 2006 dealer agreement includes two one-sided provisions that operate as time

limitations to claims by Viva. Under the “Notification and Limitation of Actions” provision of

the 2006 dealer agreement, “the dealer must notify Company in writing of any controversy or

claim it may have regarding this Agreement or its relationship with Company within 120 days of

the date Dealer became aware or should have become aware of this grievance or dispute.” 

Failure to notify is an “absolute bar to the institution of any proceedings that may have been

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based upon this grievance or dispute.” Significantly, this notice requirement applies only to

Viva, not to AT&T (Miguel Decl. Exh. B). 

In addition, under the “Limitation of Actions” provision, the parties must submit all

claims and disputes for arbitration within “180 days after the aggrieved party became aware or

should have become aware that the act or omission giving rise to the claim or dispute occurred

(Miguel Decl. Exh. B). Failure to do so is an “absolute bar” to future proceedings. The

provision makes an express exception, however, for “failure to pay invoices for equipment

purchased by Dealer from Company.” In other words, the 180-day limitations period applies to

all of Viva’s claims but to only some of AT&T’s claims. 

This order holds that the 180-day limitation and the 120-day notice requirement are both

unconscionable. Even if these time bars applied equally to both parties, they would possibly be

unconscionable. But the provisions here do not apply equally. Longer limitation periods than

these have been held to be unconscionable in the employment context. Ingle v. Circuit City

Stores, Inc., 328 F.3d 1165, 1175 (9th Cir. 2003) (applying California law and holding that a

one-year statute of limitations for an employee’s claims was unconscionable “because the benefit

of this provision flows only to” the employer); see also Davis v. O'Melveny & Myers, 485 F.3d

1066, 1077 (9th Cir. 2007) (applying California law and holding that a one-year notice

requirement functioned as a statute of limitations and was unconscionable). These limitation

provisions are one-sided and their benefits flow disproportionately to AT&T. This order

therefore finds these provisions to be unconscionable. 

AT&T argues that the validity of the notice provision is an issue for the arbitrator to

decide, not the court, because the provision is not contained within the arbitration subsection of

the 2006 agreement. It is true that the notice provision is located one paragraph above the

arbitration subsection of the contract (both the notice provision and the arbitration subsection fall

within the section titled “Disputes”). But because the notice provision profoundly affects the

terms in the arbitration subsection — it can operate as a complete bar to arbitration — this order

concludes that the notice provision is an inherent part of the arbitration agreement and therefore

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properly within this Court’s review. A contrary conclusion would allow parties to avoid judicial

scrutiny merely through clever placement of objectionable arbitration terms.

AT&T also argues that case law from the employment context is inapposite here. We

recognize that a dealer is not an employee. But this dealer is a relatively small business that sold

products and services through kiosks. The relationship between it and AT&T shares a number of

the characteristics of an employer/employee relationship. As such, case law from the

employment context informs our analysis, as it has that of other courts in similar cases. 

See Nagrampa, 469 F.3d at 1282–1292. 

(2) Fee-Splitting Provision. 

The 2006 dealer agreement requires the parties to “split equally” any arbitrator’s fees

“unless the arbitrator rules otherwise . . . or this allocation is prohibited as a matter of law.”

In addition, if one party fails to pay its share of fees, the other party can opt to “forego the use of

the arbitration process and bring its claim to a court having jurisdiction” (Miguel Decl. Exh. B).

A fee-splitting provision is “not per se substantively unconscionable.” Nagrampa, 469

F.3d at 1285 (applying California law). But a fee-splitting provision may be unenforceable as

contrary to public policy if it “impedes the vindication” of unwaivable statutory rights. Ibid.

In Armendariz v. Foundation Health Psychcare Services, Inc., the California Supreme Court

held that for an agreement to arbitrate statutory rights to be enforceable, the agreement must

meet “certain minimum requirements,” including limitations on the costs of arbitration. 24 Cal.

4th at 91. Of particular concern are those statutory rights that further a public purpose. Indeed,

California Civil Code Section 3513 states that “a law established for a public reason cannot be

contravened by a private agreement.” 

One of Pestano’s counterclaims arises under Section 17200 of the California Business

and Professional Code. Pestano asserts that the fee-splitting provision improperly impedes her

ability to vindicate rights under this statute. At least one California court has determined that

this statute creates the kind of unwaivable statutory right that deserves protection in the context

of arbitration fees. Independent Ass’n of Mailbox Center Owners, Inc. v. Superior Court,

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133 Cal. App. 4th 396, 416 (2005). Assuming that Pestano has a viable claim under

Section 17200, this provision would impede her efforts to vindicate an unwaivable right. 

In addition, the fee-splitting provision appears to create a backdoor and one-sided way

around the arbitration agreement. This is troubling. Under the provision, if one party fails to

pay its share of the fees, the other party can bring its claims in court. The provision seems

designed to benefit AT&T — chances are far greater that a small dealer will find itself unable to

pay fees than a company like AT&T. Although facially neutral, the provision will likely lead to

one-sided results, with the dealer more frequently being relegated to an inferior forum. In light

of these factors, this order finds the fee-splitting provision to be unconscionable. 

(3) The Confidentiality Provision.

Pestano also contests the confidentiality provision of the arbitration agreement, which

requires that the “nature and outcome of any arbitration under this Agreement” be kept

confidential (Miguel Decl. Exh. B). In a 2002 decision, a district court found a similar

confidentiality provision to be so one-sided and “overly harsh” as to support a finding of

unconscionability. Acorn v. Household Intern., Inc., 211 F. Supp. 2d 1160, 1174 (N.D. Cal.

2002) (applying California law). In that case, which arose in a consumer context, the arbitration

agreements required “that the award shall be kept confidential.” Id. at 1171. The court

discussed the advantages that typically inure to the benefit of companies as repeat participants in

arbitration proceedings (ibid.):

The advantages to repeat participants in the arbitration market are

well known and need not be recounted at length here. Suffice it to

say that several studies have found and several courts have held

that a party's repeated appearance before the same group of

arbitrators conveys distinct advantages over the one-time

participant. 

See also Mercuro v. Superior Court, 96 Cal. App. 4th 167, 178 (2002) (“These [repeat player]

advantages include knowledge of the arbitrators’ temperaments, procedural preferences, styles

and the like and the arbitrators’ cultivation of further business by taking a ‘split the difference’

approach to damages.”). The court found that the confidentiality provision reinforced these

“repeat participant” advantages by sheltering awards from scrutiny. Acorn v. Household Intern.,

Inc., 211 F. Supp. 2d at 1171.

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In a 2003 decision, the Ninth Circuit, applying California law, held that a district court

did not err in finding a confidentiality provision in an arbitration agreement unconscionable. 

Ting, 319 F.3d at 1152; see also Davis, 485 F.3d at 1079 (holding that a confidentiality provision

of an agreement in the employment context supported a finding of unconscionability). In that

case, in which AT&T was a party, an arbitration clause in a long-distance service contract

included a confidentiality provision. The Ninth Circuit explained that the confidentiality

provision allowed AT&T to place itself “in a far superior legal posture by ensuring that none of

its potential opponents have access to precedent while, at the same time, AT&T accumulates a

wealth of knowledge on how to negotiate the terms of its own unilaterally crafted contract.” 

Ting, 319 F.3d at 1152. This applies here as well. This order holds that the confidentiality

provision is one-sided. It allows AT&T to accumulate knowledge concerning dealer awards but

keeps all dealers in the dark. 

(4) Provision Concerning Assignment of Rights.

Finally, Pestano argues that the provision of the 2006 dealer agreement concerning

assignment of rights supports a finding of unconscionability. Pestano asserts that this provision

allows AT&T, but not Viva, to assign its rights to another party, including the right to enforce

arbitration. While this provision might affect the validity of the contract as a whole, a district

court’s role in a motion to compel is limited to reviewing the arbitration agreement. Nagrampa,

469 F.3d at 1264. And Pestano has not made clear how the provision affects the

unconscionability of the arbitration agreement in particular as opposed to the contract as a

whole. Nor does Pestano cite to any case law to support her position. This order therefore

concludes that the assignment provision does not support a finding of unconscionability on the

arbitration agreement.

C. Severability of Objectionable Provisions.

If a trial court determines that a particular provision of an arbitration agreement is

unconscionable, it can proceed in one of two ways. In some situations, the offending provision

can be severed and the remaining agreement enforced. McManus v. CIBC World Markets Corp.,

109 Cal. App. 4th 76, 101 (2003) (“An agreement to arbitrate may be enforced if the

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unconscionable provisions can be severed from the agreement.”). In other situations, the trial

court has the discretion to declare the entire arbitration agreement invalid. Armendariz, 24 Cal.

4th at 122. 

In Armendariz, the California Supreme Court discussed the contours of a trial court’s

discretion to declare an entire arbitration agreement invalid. Id. at 121–127. In that case, an

employment contract required arbitration of an employee’s wrongful termination claims but did

not require arbitration of an employer’s claims against an employee. In addition, the arbitration

agreement limited damages to back pay and precluded discovery. The trial court found the

arbitration agreement to be invalid in its entirety and the California Supreme Court concluded

that the trial court did not abuse its discretion in so holding. Looking at the relevant statute (Cal.

Civ. Cod. § 1670.5), as well as its legislative history, the court concluded that “the statute

appears to give a trial court some discretion as to whether to sever or restrict the unconscionable

provision or whether to refuse to enforce the entire agreement. But it also appears to

contemplate the latter course only when an agreement is permeated by unconscionability.” Id. at

122. Noting a dearth of case law on the issue of severability in the arbitration context, the

California Supreme Court looked to general contract law, summarizing the general principles of

severability in this way (id. at 124):

Courts are to look to various purposes of the contract. If the

central purpose of the contract is tainted with illegality, then the

contract as a whole cannot be enforced. If the illegality is

collateral to the main purpose of the contract, and the illegal

provision can be extirpated from the contract by means of

severance or restriction, then such severance and restriction are

appropriate.

In that case, two factors weighed against severance of the unlawful provisions. First, the

arbitration agreement included more than one unlawful provision. “Such multiple defects

indicate a systematic effort to impose arbitration on an employee not simply as an alternative to

litigation, but as an inferior forum that works to the employer’s advantage.” Id. at 124. Second,

because of the agreement’s lack of mutuality, the unconscionability could not be cured by striking

offensive provisions; rather, “the court would have to, in effect, reform the contract . . . by

augmenting it with additional terms.” Id. at 125; see also Davis, 485 F.3d at 1084 (holding an

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entire arbitration agreement to be unenforceable because the unconscionable provisions could not

be stricken without “gutting the agreement”).

This order finds that the arbitration provision is so permeated with unconscionability as to

make the entire arbitration clause invalid. The number of provisions in the agreement found to be

unconscionable indicates a “systematic effort to impose arbitration” as an “inferior forum” that

works to AT&T’s advantage. Armendariz., 24 Cal. 4th at 124. This order therefore declines to

sever the unconscionable provisions and instead declares the entire arbitration provision invalid. 

AT&T’s motion to compel arbitration is therefore DENIED.

This order does not reach the question of whether the arbitration clause in the 2001

agreement is unconscionable. AT&T has argued, and this order has accepted, that the 2006

agreement superseded the 2001 agreement (Reply Br. 13; Miguel Decl. Exh. B). The parties’

briefs have concentrated on the validity of the 2006 agreement, not the validity of the 2001

agreement.

4. MOTION TO DISMISS PESTANO’S COUNTERCLAIMS.

AT&T also moves to dismiss Pestano’s first, second, fifth, and sixth counterclaims under

Rule 12(b)(6). AT&T, however, submits and relies on facts outside Pestano’s responsive

pleading. A federal court must convert a Rule 12(b)(6) motion to one for summary judgment

when the parties submit, and the court does not reject, material beyond the pleadings. 

In re Rothery, 143 F.3d 546 (9th Cir. 1998). Entry of summary judgment is proper only where

the pleadings, the admissions on file, and the affidavits, if any, show that there is no genuine issue

as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed.

R. Civ. P. 56(c).

Pestano requests relief under Rule 56(f) to conduct discovery in order to oppose AT&T’s

motion. Pestano asserts that further discovery would be conducted into (Opp. 16):

(1) the intent of the parties and circumstances surrounding the

SMF Release (including Section 1) and the APA; (2) facts

surrounding the enforceability of SMF Release (due to breach or

mistake) and Section 1 of the SMF Release; (3) facts known to

AT&T which it did not disclose prior to entry into the APA and

representations made around the APA; (4) the nature and extent of

AT&T’s unfair and oppressive conduct; and (5) steps AT&T took

to address the issues in the dealer market.

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Because Pestano has not yet had the opportunity to conduct discovery, this order grants relief

under Rule 56(f) to do so. The motion to dismiss is DENIED as a disguised summary judgment

motion.

Pestano also requests leave to amend her pleading to allege a claim for restitution under

Section 17200. This order GRANTS Pestano 10 days to amend her pleading.

At the hearing on this motion, AT&T suggested that the main action (AT&T’s

affirmative claims) be stayed pending arbitration of the counterclaims. AT&T also offered to

voluntarily submit its affirmative claims to arbitration. These suggestions come without the

benefit of briefing. Since the arbitration clause is unenforceable, it is unnecessary to reach these

suggestions.

CONCLUSION

For the reasons stated above, this order finds that the AT&T arbitration agreement is

unconscionable and therefore invalid. Plaintiff’s motion to compel arbitration is therefore

DENIED. The motion to dismiss is DENIED without prejudice to renewal as a summary judgment

motion after a fair opportunity for discovery. Defendant’s requests for a continuance under

Rule 56(f) and for leave to amend are GRANTED.

In no way does this order express any opinion on the merits of how the competing claims

should be resolved. Counsel are reminded of the scheduling order and the need to meet all

deadlines.

IT IS SO ORDERED.

Dated: March 7, 2008. 

WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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