Lead Opinion
In this case, we consider whether a class arbitration waiver in New Cingular Wireless Service Inc.’s standard contract for cellular phone services is unconscionable under California law, and whether the Federal Arbitration Act preempts a holding that the waiver is unenforceable. We hold that the waiver is unconscionable, and, thus, unenforceable, and that the invalidation of the contract provision is not preempted by the Federal Arbitration Act. Accordingly, we reverse the district court’s order compelling arbitration.
On February 22, 2006, Appellant Kennith Shroyer filed a class action lawsuit in the California Superior Court against Ap-pellees New Cingular Wireless Services, Inc., AT & T Corp. (AT & T), and Does 1 through 100, alleging that he and similarly situated plaintiffs (“the class” or “class members”) had suffered injuries as a result of the 2004 merger between Cingular Wireless LLC and AT & T Wireless Services, Inc. (AT & T) that created New Cingular Wireless Services, Inc. (Cingu-lar), and in particular by the actions of Cingular subsequent to the merger. Shroyer pled seven causes of action based on California state statutes and common law, including (1) unfair competition under Cal. Bus. & Prof.Code § 17200, et seq.; (2) untrue and misleading advertising under Cal. Bus. & Prof.Code § 17500; (3) violations of the Consumers Legal Remedies Act, Cal. Civil Code § 1750; (4) breach of contract; (5) breach of the covenant of good faith and fair dealing; (6) fraud and deceit under Cal. Civil Code § 1710; and (7) unjust enrichment. Shroyer requested damages, declaratory relief, and injunctive relief.
Shroyer’s complaint alleges that when AT & T and Cingular merged the cellular phone services received by AT & T’s customers deteriorated significantly. Simultaneously, Cingular sought to induce the customers of AT & T to transfer their service plans and equipment from AT & T to Cingular in order to increase the company’s profits. When class members complained about the new problems associated with their AT & T service plans, Cingular allegedly told them that it could provide members with a “chip” that would restore their service quality. To receive the chip, however, class members would be required to extend their current contracts by entering into “Wireless Service Agreements” (Agreements) with Cingular, and, thus, to switch their service plans from AT & T to Cingular. Cingular also allegedly told class members that when they extended their contracts with Cingular, they would not be able to retain the more favorable rates contained in their existing AT & T contacts.
Shroyer initially subscribed to AT & T service plans in 2000 and 2003. After the merger, he complained about his service, and Cingular told him that it would be improved if he signed a new contract with Cingular. On January 2, 2005, Shroyer switched his two cellular phone accounts from AT & T to Cingular by entering into new Agreements with Cingular. Shroyer, like other class members who entered into Agreements with Cingular, executed an electronic signature over the telephone to assent to the terms of the Agreements. Shroyer selected the answer “Yes” in response to the statement “You agree to the terms as stated in the Wireless Service Agreement and terms of service.”
The form contract to which Shroyer assented states that the Agreement incorporates by reference Cingular’s Terms and Conditions Booklet, “including its binding
Most important, the arbitration provision contains a class arbitration waiver that bars individuals from bringing representative claims:
You and Cingular agree that YOU AND CINGULAR 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. 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.
One month after Shroyer filed his complaint, Cingular removed the action to the United States District Court for the Central District of California pursuant to 28 U.S.C. §§ 1441, 1446, and 1453, asserting subject matter jurisdiction under the Class Action Fairness Act of 2005 (CAFA), Pub.L. 109-2, 119 Stat. 14 (2005), 28 U.S.C. § 1332(d). Cingular then promptly filed a motion to compel arbitration and stay further proceedings in the litigation pursuant to § 3
After hearing oral argument, District Judge Manuel Real announced that he would grant Cingular’s motion to compel arbitration and dismiss the action without prejudice. Ten days later, Cingular filed a seven-page proposed order—“[Defendant’s Proposed] Order Compelling Arbitration and Dismissing the Action Without Prejudice”—that contained virtually all of the legal arguments and factual allegations that Cingular had made in its memorandum to support its motion to compel arbitration, and nothing else. Shortly thereafter, Judge Real entered the proposed order without making any changes to it. Shroyer filed a timely notice of appeal.
II. Jurisdiction and Standard of Review
The district court had subject matter jurisdiction pursuant to 28 U.S.C. § 1332(d), and we have appellate jurisdiction over its order compelling arbitration and dismissing the action without prejudice pursuant to 9 U.S.C. § 16(a)(3). See Sanford v. Memberworks, Inc.,
We review the district court’s order de novo. Davis v. O’Melveny & Myers,
III. Discussion
A. Unconscionability
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. “It is well-established that unconscionability is a generally applicable contract defense, which may render an arbitration provision unenforceable.” Nagrampa,
Under California law, a contract provision is unenforceable due to uncon-scionability only if it is both procedurally and substantively unconscionable. Nagrampa,
In Discover Bank, in which the California Supreme Court held that a class arbitration waiver in a consumer credit card agreement was unconscionable, the court “recapitulate^]” its “principles of uncon-seionability”:
the 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.
On two prior occasions, we have held that class arbitration waivers in contracts of adhesion are both proeedurally and substantively unconscionable. Ingle v. Circuit City Stores, Inc.,
Subsequent to Ingle and Ting, the California Supreme Court in Discover Bank expressed approval of the California Court of Appeal’s decision in Szetela, and affirmed that — as we had concluded in both Ingle and Ting — class action waivers, including those in arbitration clauses, may be unconscionable under California law, although not necessarily in all cases. Discover Bank,
Discover Bank involved a plaintiff whose credit card agreement contained a class arbitration waiver. 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. at 152,
We do not hold that all class action waivers are necessarily unconscionable. But 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 property of another.” (Civ.Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced.
Id. at 162,
The California Courts of Appeal have construed Discover Bank as providing for a three-part inquiry in order to determine whether a class action waiver in a consumer contract is unconscionable. See Cohen v. DirecTV, Inc.,
First, as in Discover Bank, Cin-gular’s Agreements for cellular phone services are “consumer” contracts. They are also “contracts of adhesion.” 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.’ ” Nagrampa,
Second, the Cingular Agreements occurred “in a setting in which disputes between the contracting parties predictably involve small amounts of damages.” Disover Bank,
Third, Shroyer’s complaint plainly “allege[s] 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.” Discover Bank,
Because all three parts of the Discover Bank test are satisfied, Cingular’s class arbitration waiver is both proeedurally and substantively unconscionable, and cannot be enforced. Discover Bank,
Cingular first argues that there was no procedural uneonscionability because after Discover Bank the California Courts of Appeal have stated that “[tjhere can be no ‘oppression’ establishing procedural uneon-scionability, even assuming unequal bargaining power and an adhesion contract, when the customer has meaningful choices: ‘[Ajny claim of ‘oppression’ may be defeated if the complaining party has reasonably available sources of supply from which to obtain desired goods or services free of the terms claimed to be unconscionable.’ ” Wayne v. Staples, Inc.,
In three opinions subsequent to both Discover Bank and all of the eases to which Cingular cites, we have rejected Cingular’s “meaningful alternatives” or “marketplace alternatives” argument. See Douglas v. U.S. Dist. Court for the Central Dist. of Cal.,
Thus, contrary to Cingular’s contention, a contract may be procedurally unconscionable under California law when the party with substantially greater bargaining power “presents a ‘take-it-or-leave it’ contract to a customer — even if the customer has a meaningful choice as to service providers.” Douglas,
Next, Cingular contends that the class arbitration waiver at issue here is 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 Cingular “from responsibility for [its] own fraud, or willful injury to the person or property of another.”
Cingular’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.”
Because Cingular 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. Cingu-lar’s arbitration provision has a nonsevera-bility clause, which states that if the “specific proviso” that “the arbitrator may not ... preside over any form of a representative or class proceeding,” “is found to be
B. Preemption
Having concluded that the district court erred in holding that the Cingular class arbitration waiver is not unconscionable, we turn to its alternative holding that a finding that the waiver is unconscionable would be expressly and impliedly preempted by the Federal Arbitration Act. Again, we conclude that the district court erred. The Federal Arbitration Act does not bar federal or state courts from applying generally applicable state contract law principles and refusing to enforce an unconscionable class action waiver in an arbitration clause.
i. Express Preemption
Cingular contends that the district court correctly held that a finding that Cingu-lar’s arbitration provision is unconscionable under California law would be expressly preempted by the Federal Arbitration Act because such a finding would “fall outside Section 2’s saving clause for ‘grounds as exist at law or in equity for the revocation of any contract.’ ” (quoting 9 U.S.C. § 2). It asserts that the uneon-scionability principles applied in Discover Bank—the same principles that we have applied here to find a provision of Cingu-lar’s arbitration clause to be unconscionable—“subject arbitration clauses to special scrutiny,” Iberia Credit Bureau, Inc. v. Cingular Wireless LLC,
The California Supreme Court in Discover Bank soundly rejected this very same express preemption argument that Cingular now makes,
*988 [bjecause unconscionability is a generally applicable contract defense, it may be applied to invalidate an arbitration agreement without contravening § 2 of the FAA. See Doctor’s Assocs.,517 U.S. at 687 [116 S.Ct. 1652 ], We recognize ... that the FAA preempts state laws of limited applicability ... but we follow wellsettled Supreme Court precedent in rejecting the proposition that uncon-scionability is one of those laws. See id. at 686-87,116 S.Ct. 1652 (stating that the Act “declares that state law may be applied if that law arose to govern issues concerning validity, revocability, and enforceability of contracts generally,” and holding that “generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration agreements without contravening” the FAA) (emphasis added).
We see no reason to revisit Ingle and Ting, both of which plainly foreclose Cin-gular’s express preemption argument, and Cingular offers no basis upon which to distinguish these controlling cases. However, we note that the explanation in Discover Bank that “the principle that class action waivers are, under certain circumstances, unconscionable as unlawfully exculpatory is a principle of California law that does not specifically apply to arbitration agreements, but to contracts generally,” Discover Bank,
ii. Conflict Preemption
Conflict preemption, a form of implied preemption, exists if compliance with both federal and state law is impossible, or “where state law ‘stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’ ” Quicken Loans, Inc. v. Wood,
Cingular does not contend that the application of Discover Bank renders compliance with the Federal Arbitration Act impossible. Instead, it urges us to conclude, as the district court did, that “a broad reading” of Discover Bank that invalidates its allegedly “consumer-friendly” arbitration clause “would ‘stand as an obstacle to the accomplishment and execution of the full purposes and objective of Congress’ in enacting the [Federal Arbitration Act] and would be preempted under the doctrine of conflict preemption.” (quoting United States v. Locke,
To determine whether California’s unconscionability principles stand as an obstacle to the Federal Arbitration Act,
Another purpose of the Federal Arbitration Act is “the efficient and expeditious resolution of claims,” Sink v. Aden Enters., Inc.,
Cingular contends that applying Discover Bank to require companies to permit class arbitration will undermine these purposes. It argues that most companies will choose not to arbitrate at all, if faced with the requirement of class arbitration, because the cost and complexity of arbitration would increase, as would the risk of an unfavorable and largely unreviewable decision with respect to an entire class of consumers. In particular, Cingular believes that class arbitration eliminates the benefits of arbitration, including “speed, simplicity, cost savings, informality, and reduced adversariality,” because many of the features of Federal Rule of Civil Procedure 23 are incorporated into class arbitration. We find no basis for or merit to these arguments.
First, although conflict preemption “can exist even when Congress has chosen to include an express preemption clause in a statute” or a savings clause, Nathan Kimmel, Inc. v. DowElanco,
Second, the Federal Arbitration Act’s purpose of reversing hostility to arbitration and placing arbitration agreements on the same footing as ordinary contracts does not appear to be frustrated or undermined in any way by a holding that class arbitration waivers in contracts of adhesion, like class action waivers in such contracts, are unconscionable. The California Supreme Court in Discover Bank placed arbitration agreements with class action waivers on the exact same footing as contracts that bar class action litigation outside the context of arbitration.
Third, to the extent that California law requires Cingular to permit its consumers to bring class arbitration proceedings, it is actually “encouraging alternative dispute resolution outside the courtroom.” Schoenduve,
Fourth, we reject Cingular’s contention that class proceedings will reduce the efficiency and expeditiousness of arbitration in general. If anything, when millions of consumers (or hundreds of thousands, or even lesser numbers) seek compensation based on the same legal theories and factual allegations, a class arbitration proceeding is simpler, cheaper, and faster for both the consumers and the defendant company, particularly when one considers the enormous administrative costs and attorneys’ fees that a company faces in defending an extremely large number of individual claims. Similarly, because the use of class proceedings will enable far greater
There is no reason to believe that the principal consideration of judicial economy that underlies the class action mechanism in Rule 28 would not operate similarly in the context of class arbitration. Under the class arbitration rules adopted by the American Association of Arbitration, a class proceeding may not go forward unless the arbitrator makes many of the same determinations that a judge is required to make with respect to a class action under Rule 23(a), including numer-osity, commonality, typicality, and the adequacy of the representatives and their counsel. See American Arbitration Association, Supplementary Rules for Class Ar-bitrations, Rule 4 (2003), http://www.adr. org/sp.asp?id=21936. In addition, the AAA requires that the arbitrator determine that common questions of law or fact “predominate over any questions affecting only individual members, and that a class arbitration is superior to other available methods for the fair and efficient adjudication of the controversy.” Id. As the Supreme Court has noted, inclusion of the predomination and superiority standards in a “qualification-for-certification list” serves to “cover cases ‘in which a class action would achieve economies of time, effort, expense.’ ” Amchem Prods. Inc. v. Windsor,
Because we do not foresee class arbitration increasing the average cost of arbitration for large numbers of small-value claims, either for companies or consumers, and it may actually reduce the cost per claim, Cingular’s reliance on Credit Suisse First Boston Corp. v. Grunwald,
Furthermore, if we were to hold that class arbitration conflicts with the Federal Arbitration Act in light of the Act’s secondary concern of efficiency, the indisputable result would be to undermine the primary objective of encouraging arbitration because far fewer individual consumers will participate in arbitration absent the class action device. See Amchem,
Fifth, we read Green Tree Financial Corp. v. Bazzle,
For all of these reasons, we hold that applying California’s generally applicable contract law to refuse enforcement of the unconscionable class action waiver in this case does not stand as an obstacle to the purposes or objectives of the Federal Arbitration Act, and is, therefore, not impliedly preempted.
IV. Conclusion
In sum, we hold that Cingular’s class arbitration waiver is unconscionable under California law, and that refusing to enforce such a provision, as California courts would, is not expressly or impliedly preempted by the Federal Arbitration Act. Due to the non-severability clause, under California law Cingular’s entire arbitration clause is void by its own terms. Accordingly, we reverse the district court’s order compelling arbitration and remand for the district court to consider Shroyer’s class action lawsuit.
REVERSED and REMANDED for further proceedings consistent with this opinion.
Notes
. Our conclusion here is 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,
. Section 3 provides that “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.” 9 U.S.C. § 3.
. Section 4 provides that "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 Ti-tie 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.” 9 U.S.C. § 4.
.Section 2 provides that "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 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.
. It also concluded that the “Court of Appeal [wa]s incorrect that the FAA preempts California law in this respect.” Id.; see also id. at 163-73,
. As Cingular notes, under the policy in Discover Bank, the cost to the plaintiff of participating in individual consumer arbitration would be $125 through JAMS or $100 through the National Arbitration Forum. These one-time fixed costs represent only a fraction of the cost of hiring a competent attorney for an hour of legal services.
. Arbitration furthers the purpose of efficiency because it mitigates some of the "strict procedural requirements that govern litigation in federal courts,” and "offers flexibility, an expeditious result, and is relatively inexpensive when compared to litigation.” Schoenduve,
. Nevertheless, we acknowledge that Cingular does not bear a “special burden" to demonstrate conflict preemption merely because § 2 of the Federal Arbitration Act includes a savings clause, Geier,
. Additionally, as consumers, corporations, lawyers and arbitration associations become more familiar with class arbitration, they may increasingly embrace the less formal and more flexible procedures and remedies that make arbitration desirable in the first place. See W. Mark C. Weidemaier, Arbitration and the Individuation Critique, 49 Ariz. L. Rev. 69, 96 (2007) (“The flexibility and informality of arbitration do not make it unsuitable for class litigation; quite the contrary. These attributes permit arbitrators to implement innovative procedures that courts have been hesitant to accept.” (citations omitted)).
. Cingular's citation to Iberia,
. Moreover, the deferential standard by which courts review arbitration judgments is no different in the class arbitration context than it is for individual arbitration, and Cin-gular's contention that no business would expose itself to a massive class arbitration award for which judicial review is limited is belied by the fact that sophisticated financial institutions and corporations routinely engage in individual arbitrations for disputes involving large sums of money.
Concurrence Opinion
concurring:
I concur as the result follows from our decisions in Ingle v. Circuit City Stores, Inc.,