Ninth Circuit voids class action waiver in a consumer contract

By Matt Hedberg
April 1, 2009

Last week in Chalk v. T-Mobile USA, the Ninth Circuit Court of Appeals applied Oregon law to invalidate a contractual class action waiver.  The court held that, where individual damages from breach of a consumer contract are likely to be small, a waiver of the right to pursue a class action is substantively unconscionable and therefore unenforceable.

This case was filed in the federal district court in Oregon in 2006 by a plaintiff who bought a wireless internet plan and card from T-Mobile.  The service agreement provided for arbitration under the American Arbitration Association’s Wireless Industry Arbitration Rules.  The arbitration clause barred class-wide proceedings.  When the plaintiff could not get the wireless internet card to fit in her laptop, she commenced a putative class action against T-Mobile, alleging a violation of Oregon’s Unlawful Trade Practices Act (UTPA).  T-Mobile moved to compel arbitration pursuant to the service agreement.

In opposing the motion, the plaintiff argued that the bar on class-wide proceedings rendered the arbitration agreement unconscionable and therefore unenforceable. The district court rejected this argument and upheld the waiver.  The plaintiff also argued that the costs of arbitration would be prohibitively expensive and preclude her from vindicating her statutory rights.  The Court rejected this argument because the plaintiff did not present any evidence to support her cost estimates.

The district court did find merit in the plaintiff's argument that the arbitration agreement was unconscionable because it would prevent the arbitrator from awarding her attorney fees pursuant to the UTPA.  Instead of invalidating the arbitration agreement, however, the Court severed those provisions that would prevent the arbitrator from awarding attorney fees to the plaintiff.

On appeal, the Ninth Circuit relied on Vasquez-Lopez v. Beneficial Oregon, Inc., an Oregon Court of Appeals case decided after the district court issued its ruling.  Applying Vasquez-Lopez, the court held the class action waiver was substantively unconscionable and unenforceable under Oregon law due to its one-sided nature.  Class action waivers unfairly prevent individuals from vindicating their rights when the cost of pursuing each claim individually outweighs the potential relief, according to the court.  The court was careful to note that it did not hold that all class action waivers are necessarily unconscioniable.  Finally, because the arbitration agreement prohibited severance of the waiver, the court ruled the agreement as a whole unenforceable.

See our January 2007 coverage of the Vasquez-Lopez case here.

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