Ninth Circuit Finds Class Action Waiver Unconscionable

In Chalk v. T-Mobile USA, Inc., No. 06-35909 (9th Cir. Mar. 27, 2009), the issue before the Ninth Circuit is whether a class action waiver in an agreement between T-Mobile and its customers is unconscionable under Oregon law.

Steward and Chalk (plaintiffs) bought from T-Mobile a PC card manufactured by Sony. The card enables computers to connect wirelessly to the Internet. By signing the one-year service agreement with T-Mobile, the plaintiffs acknowledged that the agreement:

• REQUIRES MANDATORY ARBITRATION OF DISPUTES;

• REQUIRES MANDATORY WAIVER OF THE RIGHT TO JURY TRIAL AND WAIVER OF ANY ABILITY TO PARTICIPATE IN CLASS ACTION;

The Terms and Conditions instructs purchasers to refrain from using the service should the purchaser disagree with the terms. It also provides for mandatory arbitration of all claims by the American Arbitration Association and states that each party agrees to pay its “own other fees, costs and expenses including those for counsel, experts, and witnesses.”

Plaintiffs were not able to make the card to function properly, and after contacting Sony and T-Mobile several times without success, plaintiffs filed a class action suit. Plaintiffs alleged violation of federal and state law and alleged that the defendants knew or should have known that the card was not compatible. Defendants filed a motion to compel arbitration citing the arbitration clause and the district court granted it.

The Ninth Circuit reviewed the validity of the agreement under Oregon law, in particular, the plaintiffs’ allegations of unconscionability:

1. Procedural unconscionability: “oppression” and “surprise.” Here, the court agreed with the district court and held that the “take-it -or-leave-it” nature of the contract was not procedural unconscionable.
2. Substantive unconscionability. The court analyzed whether the terms of the agreement are “unfairly one-sided.” It held that the class action waiver is substantively unconscionable and unenforceable. The court based its finding in two reasons: (a) the waiver is inherently one-sided when contained in a consumer contract and (b) it prevents individuals from vindicating their rights.

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