Opinion ID: 1436159
Heading Depth: 2
Heading Rank: 1

Heading: AT & T's class action waiver is unconscionable under California law.

Text: The district court did not err when it held AT & T's class action waiver was unconscionable under California law, and thus unenforceable. Under the Federal Arbitration Act, 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. It is wellestablished that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable. Shroyer, 498 F.3d at 981(internal citations omitted). To be unenforceable under California law, a contract provision must be both procedurally and substantively unconscionable. Id. at 981. Procedural unconscionability generally takes the form of a contract of adhesion, that is, a contract drafted by the party of superior bargaining strength and imposed on the other, without the opportunity to negotiate the terms. Id at 982. Substantive unconscionability focuses on overly harsh or one-sided contract terms. Id. Both elements of unconscionability need not be present to the same degree; California courts use a sliding-scale: the more substantively unconscionable the contract term, the less procedurally unconscionable it need be to be unenforceable and vice versa. Id. at 981-82. The California Supreme Court addressed the unconscionability of class action waivers in arbitration agreements for the first time in Discover Bank v. Sup.Ct., 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), holding that class action waivers were at least sometimes unconscionable under California law. 30 Cal.Rptr.3d 76, 113 P.3d at 1108. Class actions, the court reasoned, serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money. [4] Id. at 1105. Class action waivers pose a problem because, small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. Id. at 1106. In this way, the class action waiver allows the company to insulate itself from liability for its wrongdoing and the policy behind class actions is thwarted. Id. at 1109. With this in mind, the Discover Bank court held: when the [class] 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 ... the waiver becomes in practice the exemption of the party from responsibility for its own fraud, or willful injury to the person or property of another. Under these circumstances, such waivers are unconscionable under California law and should not be enforced. Id. at 1110 (internal quotations omitted). The reasoning behind this rule is pretty easy to grasp. As we explained in Shroyer: 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. 498 F.3d at 986. We have interpreted Discover Bank as creating a three-part test to determine whether a class action waiver in a consumer contract is unconscionable: (1) is the agreement a contract of adhesion; (2) are disputes between the contracting parties likely to involve small amounts of damages; and (3) is it alleged that the party with superior bargaining power has carried out a scheme deliberately to cheat large numbers of consumers out of individually small sums of money. Id. at 983. In Shroyer, we noted that there are most certainly circumstances in which a class action waiver is unconscionable under California law despite the fact that all three parts of the Discover Bank test are not satisfied. Id. Because we hold that the class action waiver at issue satisfies all three parts of the test, as was true in Shroyer, it is unnecessary to explore those circumstances here. Id.