Petition for Writ of Certiorari — T-Mobile USA, Inc. v. Laster (No. 07-976)

Supreme Court brief2007

Ask Donna

What actually matters in this document.

Text

aC S.

Pa ss

07-976 JAN 23 2008

No.07- OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

T-MOBILE USA, INC., OMNIPOINT COMMUNICATIONS,

INC. D/B/A T-MOBILE, AND TMO CA/NV, LLC,

Petitioners,

JENNIFER L. LASTER, ANDREW THOMPSON, ELIZABETH

VOORHIES, ON BEHALF OF THEMSELVES AND ALL OTHERS

SIMILARLY SITUATED AND ON BEHALF OF

THE GENERAL PUBLIC,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Ninth Circuit

PETITION FOR A WRIT OF CERTIORARI

JAMES C. GRANT CARTER G. PHILLIPS*

SHELLEY M. HALL PAUL J. ZIDLICKY

STOKES LAWRENCE, P.S. PETER C. PFAFFENROTH

800 Fifth Avenue JAMES C. OWENS

Suite 4000 SIDLEY AUSTIN LLP

Seattle, WA 98104-3179 1501 K Street, N.W.

(206) 626-6000 Washington, D.C. 20005

(202) 736-8000

Counsel for Petitioners

January 23, 2007 * Counsel of Record

TARE AROS a POLE Le SET REIT OR DETER PITTS RACER EOD. EEE

WicSON-EPES PRINTING Co., INC. - (202) 789-0096 -— WASHINGTON, D. C. 20002

QUESTION PRESENTED

Whether, under the Federal Arbitration Act, a

federal court may refuse to enforce the terms of an

agreement to arbitrate based upon a state-law policy

that individual arbitration is unconscionable in cases

involving small claims by a consumer.

LIST OF PARTIES AND AFFILIATES

In addition to the parties listed in the caption, the

following also were involved in the proceedings below:

Verizon Communications, Inc., Cellco Partnership

d/b/a Verizon Wireless, Verizon Wireless (VAW) LLC,

Airtouch Cellular, Cingular Wireless LLC, Go

Wireless, and New Cingular Wireless PCS d/b/a

Cingular Wireless. |

Pursuant to Rule 29.6 of the Rules of this Court,

petitioner T-Mobile USA, Inc. is a wholly-owned

subsidiary of T-Mobile Global Holding GmbH, which

is a wholly owned _ subsidiary of T-Mobile

International AG, which, in turn, is a wholly owned

subsidiary of Deutsche Telekom AG. Deutsche

Telekom AG is a publicly traded company, of which

approximately 14.83% and 16.87% is owned by the

Federal Republic of Germany and the Kreditanstalt

fir Wiederaufbau (a bank controlled by the

Government of the Federal Republic of Germany),

respectively. No other publicly-held company owns

10% or more of T-Mobile USA, Inc.

Petitioner Omnipoint Communications, Inc. is a

wholly-owned subsidiary of T-Mobile USA, Inc.

Petitioner TMO CA/NV, LLC, is a wholly-owned

subsidiary of TMO CA/NV Holdings LLC. TMO

CA/NV Holdings LLC is a wholly-owned subsidiary of

Omnipoint Communications, Inc., which, as noted, is

a wholly-owned subsidiary of T-Mobile USA, Inc.

TABLE OF CONTENTS

Page

QUESTION PRESENTED .........-cscccsscsssseesesseeees

LIST OF PARTIES AND AFFILIATES.............-. ii

TABLE OF AUTHORITIES ...0......ccsssccssecesssseeesse iv

CPUPUUEIOI REFIT ian cccceccccecccescreese 1

ee 1

STATUTES INVOLVED ...c:seccsscsscscesssseccseccsssseees 1

STATEMENT OF THE CASE. ..0....cccsescceeccsseeeoeee- 2

STATUTORY BACKGROUND ......sccsssccsssesessseees 4

FACTUAL BACKGROUND ..e.sccccsesessessseecssseeeseee: 6

REASONS FOR GRANTING THE PETITION... 11

I. THE DECISION BELOW IMPLICATES A

CONFLICT AMONG STATE AND FED-

ERAL COURTS OVER THE ENFORCE-

ABILITY OF INDIVIDUAL ARBITRA-

TION UNDER THE FAA... eee seeeee 14

Il. THE DECISION BELOW CONFLICTS

WITH THIS COURT'S PRECEDENT.......... 25

CFE eE OD sicninccclaninveonsaviakgapabigeiaintatekieibanaiiahs - 30

APPENDIX A: Laster et al. v. T-Mobile USA,

Inc. et al., No. 06-55010 (9th Cir. Oct. 285,

ERR SEL Wes Re amy wat mv. vee Ue BlKaRi der eae EN la

APPENDIX B: Laster v. T-Mobile USA, Inc.,

407 F. Supp. 2d 1181 (S.D. Cal. 2005).............. Aa

APPENDIX C: Federal Statutes ...........ccccccscee-e. 34a

APPENDIX D: T-Mobile Welcome Guide (ex-

I eiica iiatisc en tatbiecsnidons biccaiedeasemesrincetiataanaass 36a

TABLE OF AUTHORITIES

CASES Page

Allied-Bruce Terminix Cos. v. Dobson, 513 |

ee i iiecicniscnshnodacicsnusstssncacesevs 5, 23

Booker v. Robert Half Inti, Inc., 413 F.3d

Fe GC I, PE Ainickisnicen ts Aicdacsiacetsnasacesesocs 21

Carbajal v. H&R Block Tax Servs., Inc.,

372 F.3d 903 (7th Cir. 2004))..................... 23

Circuit City Stores v. Adams, 532 U.S. 105

(p HBRE STEERS SRC DE An Tean ANE ERaR a SE Oa ' 4,6

Coady v. Cross Country Bank, 729 N.W.2d

732. (Wis. Ct. App.), review denied, 737

PA We Oe Cs BED Snasccncnindaaccdacncscecense 18

Dean Witter Reynolds Inc. v. Byrd, 470

BE i iididsiis dccauaiesidcindadinickenaspoetaas 5, 28

Discover Bank v. Superior Court, 113 P.3d

Re I abcd cccectcpacainrscnsevssnnciqais passim

Doctor’s Assocs., Inc. v. Casarotto, 517 U.S.

I ic iin sch tl ucenasansbieisouainn 6, 26, 28

Faber v. Menard, Inc., 367 F.3d 1048 (8th

I i wild naecincn ac db oicharmkaaian 21

Gay v. CreditInform, __ F.3d __, 2007

WL 4410362 (3d Cir. Dec. 19, 2007)...... passim

Gilmer v. Interstate/Johnson Lane Corp. be

TS FF Fe EID ones cies tnnsncboscsidindesespnacsninaces §,13

Jenkins v. First Am. Cash Advance of Ga.,

LLC, 400 F.3d 868 (11th Cir. 2005), cert.

denied, 546 U.S. 1214 (2006)................3, 21, 25

Johnson v. West Suburban Bank, 225 F.3d

A Ge I vn ccsatenscinssbnccssnsesspacesen 3, 22, 25

Kristian v. Comcast Corp., 446 F.3d 25 (1st

ee rrr aricdandeciesinsecs cine snavarancsacecon LY, Zk, 25

Livingston v. Associates Fin., Inc., 339 F.3d

Soe a Fe Me, SND sins snc sos vncncs cca ccosencaitese 3, 22, 25

TABLE OF AUTHORITIES — continued

Page

Lowden v. T-Mobile USA, Inc., __ F.3d _,

2008 WL 170279 (9th Cir. Jan. 22,

SE sirichutistisachiekuhdancabicieasnhgndesaateness 2, 12, 17, 24

Mitsubishi Motors Corp. v. Soler Chrysler-

Plymouth, Inc., 473 U.S. 614 (1985).......... 5, 29

Moses H. Cone Mem’ Hosp. v. Mercury

Constr. Corp., 460 U.S. 1 (1983).... 5, 26, 28, 29

Muhammad v. County Bank of Rehobath

Beach, Del., 912 A.2d 88 (N.J. 2006), cert.

denied, 127 S. Ct. 2032 (2007)................... ee

Oblix, Inc. v. Winiecki, 374 F.3d 488 (7th

A i Gisiscnder etal steiadasartammncainswidhcxcsxas 20, 23

Perry v. Thomas, 482 U.S. 483 (1987)...... passim

Randolph v. Green Tree Fin. Corp., 244

P.3G Gi4 C21 Cr. BOOT)... ccc csc cesses pence. er |

Scott v. Cingular Wireless, 161 P.3d 1000

COW RA IEE Bicdniescccseccsscnchunsscsassacad %.. 17, 18, 24

Shearson/Am. Express, Inc. v. McMahon,

MAREE TF Fe Fe RTA sa sissins Sa accvednasancisnvencnaieass 27

Shroyer v. New Cingular Wireless Seruvs.,

Inc., 498 F.3d 976 (9th Cir. 2007).......... passim

Snowden v. CheckPoint Check Cashing,

290 F.3d 631 (4th Cir. 2002).......... 3, 21, 22, 25

Southland Corp. v. .Keating, 465 U.S. 1

Phat indices sien xxadihwesabaacatianed 5, 6, 26, 27, 29

Volt Info. Scis., Inc. v. Board of Trs., 489

Be MO I is casein cnintpdcncduarsach sauce 4, 5, 12, 28

STATUTE AND REGULATION

Ea cae casas panuaesnsoiaGancan a hae

is ee cas 1, 4, 12

Cal. Bus. & Prof. Code § 17200..................... 9

Osea 9

TABLE OF AUTHORITIES — continued

a as SE BE ii crctssnasicisicdgrencsoctacivaas

Cal. Code Regs. tit. 18, § 1585..................:...

SCHOLARLY AUTHORITIES

Michael G. McGuinness & Adam J. Karr,

California’s “Unique” Approach to

Arbitration: Why This Road _ Less

Traveled Will Make All the Difference on

the Issue of Preemption Under the

Federal Arbitration Act, 2005 J. Disp.

EEE I a) a a

Susan Randall, Judicial Attitudes Toward

Arbitration and the Resurgence of

Unconscionability, 52 Buff. L. Rev. 185

Stephen J. Ware, Arbitration and Uncon-

scionability After Doctor’s Associates, Inc.

v. Casarotto, 31 Wake Forest L. Rev.

NE MN aii inet hcsitiscdeiscsasaticniiadaencemoodice

PETITION FOR A WRIT OF CERTIORARI

Petitioners T-Mobile USA, Inc., OmniPoint

Communications, Inc. d/b/a T-Mobile, and TMO

CA/NV, LLC (collectively, “T-Mobile”) respectfully

request that this Court grant the petition for a writ of

certiorari to review the decision and judgment of the

United States Court of Appeals for the Ninth Circuit.

OPINIONS BELOW

The opinion of the Ninth Circuit is unreported and

is reproduced in the Appendix to this Petition (“Pet.

App.”) at la to 3a. The decision of the District Court

denying T-Mobile’s motion to compel arbitration is

published at 407 F. Supp. 2d 1181 (S.D. Cal. 2005),

and is reproduced at Pet. App. 4a-33a.

JURISDICTION

This lawsuit originally was filed in California

Superior Court and was removed to federal court in

May 2005. Plaintiff Jennifer Laster thereafter filed

an amended complaint invoking federal jurisdiction

based upon diversity of citizenship under the Class

Action Fairness Act of 2005. The district court had

jurisdiction under 28 U.S.C. §§ 1332(d) and 1453(b).

The Ninth Circuit had appellate jurisdiction over the

district court’s denial of T-Mobile’s motion to compel

arbitration under 9 U.S.C. § 16(a)({1). This Court has

jurisdiction over this petition for review of the Ninth

Circuit's October 25, 2007 decision under 28 U.S.C.

§ 1254(1). |

STATUTES INVOLVED

Sections 2 and 4 of the Federal Arbitration Act

(“FAA”) are reproduced in the Appendix at Pet. App.

34a-35a.

STATEMENT OF THE CASE

This case presents the recurring question whether

Section 2 of the FAA permits federal courts to refuse

to enforce agreements to arbitrate claims individually

based on a_e state-law policy that individual

arbitration of consumer claims is_ substantively

unconscionable. Respondent Jennifer Laster

purchased a T-Mobile phone and entered into a

written agreement to resolve disputes with T-Mobile

through individual arbitration. Notwithstanding

that agreement, Laster filed a class action on behalf

of herself and all similarly situated California

consumers claiming that T'-Mobile violated California

law by charging California sales tax on the full retail

value of discounted wireless telephones. The court

below, applying prior Ninth Circuit and California

Supreme Court precedent in Shroyer v. New Cingular

Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007),

and Discover Bank v. Superior Court, 113 P.3d 1100

(Cal. 2005), held that Laster’s arbitration agreement

with T-Mobile was unenforceable because it provided

for individual and not class-wide arbitration.

The Ninth Circuit’s decision is in direct conflict

with the Third Circuit’s ruling in Gay sv.

CreditInform, ___ F.3d ___, 2007 WL 4410362 (3d Cir.

Dec. 19, 2007). Indeed, the Ninth Circuit has

expressly declined “to follow the Third Circuit’s

holding in Gay.” Lowden v. T-Mobile USA, Inc., ___

F.3d __, 2008 WL 170279, at *8 n.3 (9th Cir. Jan. 22,

2008). In Gay, the Third Circuit, relying on this

Court’s decision in Perry v. Thomas, 482 U.S. 483

(1987), has ruled that the FAA precludes a court from

refusing to enforce an agreement to arbitrate

individually based upon a state-law determination

that individual arbitration of small consumer claims

is unconscionable. 2007 WL 4410362, at *20. The

Gay Court concluded that state unconscionability

standards are preempted to the extent that they

would render individual arbitration unenforceable.

Denying enforcement on those grounds, the Gay

Court explained, would be tantamount to “rely[ing]

on the uniqueness of an agreement to arbitrate as a

basis for a state-law holding that enforcement would

be unconscionable.” Jd. (quoting Perry, 482 U.S. at

492 n.9).

The Gay decision, in turn, builds on decisions by

other federal~~circuits holding that individual

arbitration is enforceable under the FAA as an

entirely appropriate mechanism for resolving federal

and state claims by consumers in cases involving

relatively small individual amounts. See Johnson v.

West Suburban Bank, 225 F.3d 366, 373 (3d Cir.

2000); accord Jenkins vy. First Am. Cash Advance of

Ga., LLC, 400 F.3d 868 (11th Cir. 2005), cert. denied,

546 U.S. 1214 (2006); Livingston v. Associates Fin.,

Inc., 339 F.3d 553 (7th Cir. 2003); Snowden ov.

CheckPoint Check Cashing, 290 F.3d 631 (4th Cir.

2002); Randolph v. Green Tree Fin. Corp., 244 F.3d

814 (11th Cir. 2001). These courts hold that the FAA

mandates enforcement of individual arbitration of

claims by consumers notwithstanding the absence of

class-wide procedures.

The instant case squarely implicates this conflict

over the enforceability of agreements to arbitrate

consumer claims individually. In the ruling below,

the Ninth Circuit applied Shroyer to hold that the

FAA does not mandate enforcement of these

agreements. Pet. App. 2a-3a. In contrast, the Third

Circuit in Gay ruled that the FAA does mandate

enforcement of agreements requiring individual

arbitration of consumer claims, and thus preempts

state law to the contrary. Moreover, the Third,

Fourth, Seventh, and Eleventh Circuits all have held

— unlike the decision below —-— that individual

arbitration allows for the effective resolution of

claims in cases involving consumers.

Resolution of this conflict is necessary because the

proper application of the FAA to consumer

arbitration agreements presents a recurring issue of

fundamental and national importance. The

enforceability of agreements to arbitrate under the

FAA is a matter that affects the rights of tens of

millions of consumers and businesses. Indeed, a

state-law rule that arbitration must provide class-

wide procedures directly undercuts the benefit of

arbitration as a streamlined, low-cost alternative to

litigation. Decisions by courts that invalidate the

terms of these arbitration agreements directly

undermine the “primary purpose” of the FAA: to

counteract judicial hostility to arbitration and to

ensure that arbitration remains a viable alternative

to litigation through enforcement of agreements to

arbitrate in accordance with their terms. See Volt

Info. Scis., Inc. v. Board of Trs., 489 U.S. 468, 479

(1989); 9 U.S.C. § 4.

Review is warranted so that the proper application

of the FAA and the rights of tens of millions of

individuals and businesses are not made to depend

upon geography or on the prevailing construction of

the FAA within an individual state or federal circuit.

STATUTORY BACKGROUND

In 1925, Congress enacted the FAA in response “to

hostility of American courts to the enforcement of

arbitration agreements.” Circuit City Stores v.

Adams, 532 U.S. 105, 111 (2001). Congress sought to

promote arbitration as a meaningful alternative to

litigation. “[B]y agreeing to arbitrate, a party ‘trades

the procedures and opportunity for review of the

courtroom for the simplicity, informality, and

expedition of arbitration.” Gilmer v. Interstate/

Johnson Lane Corp., 500 U.S. 20, 31 (1991). Indeed,

“it is typically a desire to keep the effort and expense

required to resolve a dispute within manageable

bounds that prompts [parties] to forgo access to

judicial remedies.” Mitsubishi Motors Corp. v. Soler

Chrysler-Plymouth, Inc., 473 U.S. 614, 633 (1985).

For that reason, “Congress, when enacting [the FAA],

had the needs of consumers, as well as others, in

mind.” Allied-Bruce Terminix Cos. v. Dobson, 513

U.S. 265, 280 (1995).

The “primary purpose” of the FAA is to “ensur[e]

that private agreements to arbitrate are enforced

according to their terms.” Volt Info. Scis., Inc. v.

Board of Trs., 489 U.S. 468, 479 (1989). Arbitration

agreements must be “rigorously enforce[d]” even if

“the result is ‘piecemeal’ litigation.” Dean Witter

Reynolds Inc. v. Byrd, 470 U.S. 213, 221 (1985).

Indeed, Section 2 of the FAA “compels judicial

enforcement of a wide range of written arbitration

agreements,” Circuit City, 532 U.S. at 111,

“notwithstanding any state substantive or procedural

policies to the contrary.” Perry v. Thomas, 482 U.S.

483, 489 (1987) (quoting Moses H. Cone Mem1 Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).

Under the FAA, “the underlying issue of

arbitrability” is “a question of substantive federal

law,” Southland Corp. v. Keating, 465 U.S. 1, 12

(1984), that “must be addressed with a healthy

regard for the federal policy favoring arbitration,”

Moses H. Cone, 460 U.S. at 24. In determining

whether an agreement to arbitrate is enforceable,

“the text of § 2 provides the touchstone for choosing

between state-law principles and the principles of

federal common law.” Perry, 482 U.S. at 492 n.9. As

explained in Perry, “[aJn agreement to arbitrate is

valid, irrevocable, and enforceable, as a matter of

federal law ‘save upon such grounds as exist at law or

in equity for the revocation of any contract.” Id.

(quoting 9 U.S.C. § 2) (internal citation omitted;

emphasis added by Court). “[S]tate law .. . is

applicable if that law arose to govern issues

concerning the _ validity, revocability, and

enforceability of contracts generally.” Id. at 493 n.9.

“Courts may not .. . invalidate arbitration

agreements under state laws applicable only to

arbitration provisions.” Doctor’s Assocs. Inc. v.

Casarotto, 517 U.S. 681, 687 (1996); see Perry, 482

U.S. at 493 n.9. Likewise, courts may not (i) refuse

enforcement based on state laws applicable only to

certain types or categories of contracts, Southland,

465 U.S. at 16 n.11, or (ii) rely upon a fundamental

aspect of arbitration as a basis for a ruling that

arbitration is unconscionable, Perry, 482 U.S. at 493

n.9.

FACTUAL BACKGROUND

Petitioner T-Mobile markets and sells wireless

telecommunications services, phones, and accessories

throughout the United States. T-Mobile, which

currently has more than 28 million customers, uses

standardized contracts because it cannot realistically

negotiate separate terms and conditions with each of

these customers. Of course,” no consumer | is

compelled to buy T-Mobile’s service or accept its

terms and conditions given the highly. competitive

market for wireless service.

a. Wireless service and phones often are sold

together in “bundled” transactions, in which .

consumers receive a free or significantly discounted

phone in exchange for agreeing to wireless service

contracts for a term of one or two years. When T-

Mobile offers a free or discounted phone as part of a

bundled transaction, some states (such as California)

require that T-Mobile charge sales tax based on the

full retail value of the phone.

On February 23, 2005, Plaintiff Laster purchased a

wireless phone and wireless service at a T-Mobile

store in San Diego, California. Pet. App. 8a-9a. As

part of that transaction, Laster received the phone at

no cost. California law requires that sales tax be paid

on the full retail value of the phone when the sale is

part of a bundled transaction. See Cal. Code Regs.

tit. 18, § 1585(a)(4), (b)(3). These taxes were reflected

on Laster’s receipt, which showed that she was

charged $28.22 in sales tax (based upon the $364.13

retail value of the phone). She paid the sales tax.

Pet. App. 9a. Indeed, Laster admitted in her

Complaint that when she made her purchase, her

receipt disclosed the amount of tax and that “[b]y

law, some states impose a tax based on the retail

price or cost of our product instead of the discounted

price.” First Am. Compl. 4 23 (9th Cir. Excerpts of

Record (“ER”) at 44).

At the time of her purchase, Laster also signed a

Service Agreement and agreed to terms and

conditions including “MANDATORY ARBITRA-

TION.” Pet. App. 9a; ER 123. Accompanying

Laster’s new phone was the T-Mobile Welcome Guide,

which set forth in full the terms and conditions of

service. The first paragraph advised, “IF YOU

DONT AGREE WITH THESE [TERMS AND

CONDITIONS], DO NOT USE THE SERVICE OR

YOUR UNIT.” ER 109. The Agreement provided her

with 30 days to cancel her service with no further

obligation and return her phone for a full refund. ER

109. The trial period also was disclosed on Laster’s

sales receipt. ER 81. Laster chose to keep her phone,

to continue her T-Mobile service, and to accept the

corresponding terms and conditions. See ER 77.

Section 3 of the Terms and Conditions sets forth an

arbitration agreement, which provides that it is

governed by “the Federal Arbitration Act and federal

arbitration law”:

Mandatory Arbitration: Dispute Resolution.

YOU WILL FIRST NEGOTIATE WITH US IN

GOOD FAITH TO SETTLE ANY CLAIM OR

DISPUTE BETWEEN YOU AND US IN ANY

WAY RELATED TO OR CONCERNING THE

AGREEMENT, OR OUR PROVISION TO YOU

OF GOODS, SERVICES, OR UNITS

(“CLAIM”). ... IF YOU DO NOT REACH

AGREEMENT WITH US WITHIN 30 DAYS,

INSTEAD OF SUING IN COURT, YOU AGREE

THAT ANY CLAIM MUST BE SUBMITTED TO

FINAL, BINDING ARBITRATION ....

Neither you nor we may be a representative of

other potential claimants or a class of potential

claimants in any dispute, nor may two or more

individuals’ disputes be -consolidated in one

proceeding. ... YOU AND WE ACKNOW-

LEDGE AND AGREE THAT THIS SEC. 3

WAIVES ANY RIGHT TO A JURY TRIAL OR

PARTICIPATION AS A PLAINTIFF OR AS A

CLASS MEMBER IN A CLASS ACTION.

Pet. App. 36a-37a (capitalization in original). The

arbitration agreement further provides that the

arbitrator can award Laster the same relief and

remedies as a court, and that T-Mobile would pay all

of the arbitrator fees for claims under $25, and all

arbitrator fees, except $25, for claims valued between

$25 to $1000. Id. Finally, the arbitration agreement

provided that Laster could seek relief in small claims

court. Jd. The arbitration agreement is reproduced

at Pet. App. 36a-38a.:

b. Notwithstanding this agreement, in May 2005,

Laster filed a class action in California state court.

Her lawsuit advanced three causes of action arising

from her purchase of a wireless phone and service.

First, she claimed that T-Mobile was liable under

California’s False Advertising Law, Cal. Bus. & Prof.

Code § 17500. According to the First Amended

Complaint, T-Mobile and other defendants “failed to

adequately disclose the fact that sales tax would be

_ charged on the full value of the phone,” and where

disclosure was made, as it was in Laster’s case, “the

type-size, font, and location of the disclosure” were

inadequate. First Am. Compl. J 36 (ER 48). Second,

Laster claimed that T-Mobile violated California’s

Consumer Legal Remedies Act, Cal. Civ. Code § 1780,

because its advertising with respect to her phone was

an unfair method of competition and an unfair or

deceptive act or practice. First Am. Compl. 9 42 (ER

49). Finally, Laster sought recovery under

California’s Unfair Competition Law, Cal. Bus. &

Prof. Code § 17200. First Am. Compl. § 48 (ER 50).

In connection with these claims, Laster sought

injunctive relief, restitution, compensatory damages,

“punitive damages,” and “all attorneys’ fees and

litigation expenses.” Id. 4] 44-46, 53 (ER 50, 58).

c. After removal to federal court, T-Mobile moved

to compel arbitration under the FAA. Pet. App. 5a.

The district court denied that motion, ruling first that

the arbitration agreement was contained in a form

contract, and was therefore, per se, procedurally

unconscionable. Id. at 15a-16a.

Relying on the California Supreme Court’s decision

in Discover Bank v. Superior Court, 113 P.3d 1100

(Cal. 2005), the district court also ruled that the

agreement was substantively unconscionable because

it required individual arbitration — i.e., it did not

allow class-wide arbitration. The district court

explained that under Discover Bank, “a classwide

arbitration bar is unconscionable” if: “(1) the class

action waiver is contained in a consumer contract of

adhesion, in which small amounts of damages are at

issue; and (2) 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.” Pet. App. 20a.

Because plaintiff Laster alleged claims that

‘involved individually “small amounts of money,” and

because she alleged (despite disclosures, including on

her sales receipt, that she knew she was paying the

tax) that charging consumers sales tax on the full

retail value of the phone was a “scheme to mislead

consumers,” the district court concluded that Laster

had satisfied the Discover Bank test. Pet. App. 20-

2la. The district court dismissed as irrelevant

evidence that plaintiffs had significant incentives to

arbitrate their individual claims because, if

successful, they would be entitled to attorneys’ fees

and costs. Id. at 2la-22a.

Finally, the district court adopted the conclusion

from Discover Bank that the FAA did not preempt

California law refusing to enforce individual

arbitration because that court had invoked state

unconscionability law. Pet. App. 24a. The court ruled

that “unconscionability . . . may be employed as a

principle of general applicability to invalidate an

arbitration agreement without contravening § 2 of

the FAA.” 7d.

d. The Ninth Circuit affirmed. It concluded, in an

unpublished per curiam decision, that ~T-Mobile’s

.arbitration agreement was “not substantively

distinguishable” from an agreement that the Ninth

Circuit had previously refused to enforce in Shroyer

v. New Cingular Wireless Services, Inc., 498 F.3d 976

(9th Cir. 2007). Pet. App. 2a. The panel below

explained that Shroyer “rejected the argument that

California law is preempted by the _ Federal

Arbitration Act” and that it lacked “the authority to

revisit the decision of a prior three-judge panel.” Id.

at 3a.

Specifically, in Shroyer, Judge Reinhardt, joined by

Judges Nelson and Rymer, adopted the California

Supreme Court’s state-law unconscionability analysis

in Discover Bank. Shroyer further held that the

ability of a party to recover attorneys’ fees and

arbitration costs. in individual arbitration did not

alter the conclusion that individual arbitration was

unconscionable under California law. 498 F.3d at

986. Finally, as to preemption under the FAA, the

Shroyer Court adopted Discover Bank’s analysis and

held that the FAA “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.” Id. at 987.

REASONS FOR GRANTING THE PETITION

Review is warranted because this case squarely

implicates a conflict on an important and recurring

issue of federal law: Whether the FAA requires

enforcement of agreements to arbitrate consumer

disputes on an individual basis, or whether such

agreements can be invalidated based on state-law

policy in favor of class actions.

The California Supreme Court in Discover Bank,

followed by the Ninth Circuit in Shroyer and other

state supreme courts, have held that the FAA.

permits them to refuse to enforce the terms of

agreements to arbitrate based on a _ state-law

determination that the absence of class-action

procedures available in litigation is “unconscionable.”

In stark contrast, the Third Circuit in Gay has ruled

that to the extent state law holds that arbitration

agreements are unconscionable because they lack

class-wide procedures, then state law must give way

to the requirements of the FAA. Since then, the

Ninth Circuit has considered, but “declined to follow

the holding in Gay.” Lowden v. T-Mobile USA, Inc.,

_. ~F.38d ___, 2008 WL 170279, at *8 n.3 (9th Cir.

Jan. 22, 2008). In contrast, other circuits have held

that individual arbitration agreements involving

claims by consumers must be enforced under the

FAA. See supra at 3.

Further, the ruling below conflicts with this Court’s

decisions such as Perry v. Thomas, which ruled that a

court may not rely upon the “uniqueness” of

arbitration to hold that an arbitration agreement is

“unconscionable.” 482 U.S. 483, 493 n.9 (1987). This

Court has explained that the FAA was enacted to

ensure that arbitration remains a _ meaningful

alternative to litigation. That is why the FAA

requires not simply enforcement of arbitration, but.

enforcement of arbitration in accordance with the

terms agreed to by the parties. See Volt Info. Scis.,

Inc. v. Board of Trs., 489 U.S. 468, 479 (1989); 9

U.S.C. § 4.

The decision below threatens the continued

viability of agreements to arbitrate in a broad range

of consumer transactions. The benefits of arbitration

as an alternative to litigation are lost when state law

requires that the procedures agreed to by parties in

their contracts must give way to the more formal,

expensive and time-consuming procedures found in

courtroom litigation. Under the FAA, a state-law

requirement that arbitration must _ replicate

courtroom litigation is preempted.

Here, the arbitration agreement was deemed

unenforceable even though (i) T-Mobile agreed to pay

virtually all arbitrator costs, (ii) plaintiff could

recover attorneys’ fees if she prevailed on her claims,

and (ii) plaintiff retained the option of filing suit in

small claims. court. Nevertheless, individual

arbitration was ruled unenforceable because the

parties agreed to an alternative to the complex, costly

and time-consuming class-wide procedures in

litigation and declined to subject their agreement to

the “greater degree of court involvement” and

“external supervision” necessary to implement class

arbitration. Discover Bank v. Superior Court, 113

P.3d 1100, 1106 (Cal. 2005) Gnternal quotes omitted).

Resolution of this dispute is critical to the proper

and uniform application of the FAA to the rights of

tens of millions of consumers and_ businesses

throughout the country. Individual dispute

resolution lies at the heart of agreements to arbitrate

that have been adopted by consumers and businesses

across the country, including for banking, credit

cards, internet sales, cable television, and wireless

and wireline phone services. The decision below,

however, threatens to undermine the ability of

consumers and businesses to reject the delay and

expense of traditional litigation in favor of “the

simplicity, informality, and expedition of arbitration.”

Gilmer v. Interstate/Johnson Lane Corp., 500 U.S.

20, 31 (1991).

If arbitration under the FAA is to remain a

meaningful alternative to litigation, state law should

not be permitted to bar enforcement of agreements to

arbitrate simply because they do not provide for the

same procedures associated with litigation. To

require that arbitration mirror litigation in this

fashion is nothing less than the “judicial hostility”

that Congress intended to eliminate through the

FAA.

I. THE DECISION BELOW IMPLICATES A

CONFLICT AMONG STATE AND FEDERAL

COURTS OVER THE ENFORCEABILITY

OF INDIVIDUAL ARBITRATION UNDER

THE FAA.

This case presents a conflict on the recurring

question whether, under the FAA, courts may refuse

to enforce private agreements to arbitrate that

require individual resolution of claims by consumers.

Resolution of this conflict is necessary to ensure that

the rights of tens of millions of individuals and

businesses are not made to depend on the prevailing

interpretation of the FAA in a particular state or

federal circuit.

a. The decision below adopts the analysis set

forth by the Ninth Circuit in Shroyer, 498 F.3d 976,

which, in turn, adopts the California Supreme Court’s

decision in Discover Bank, 113 P.3d 1100. Both

Shroyer and Discover Bank hold that the FAA does

not mandate enforcement of form agreements with

consumers calling for individual arbitration. Pet.

App. 2a-3a.

In Discover Bank, the California Supreme Court

held that “at least in some circumstances, .. . class

action waivers in consumer contracts of adhesion are

unenforceable, whether the consumer is being asked

to waive the right to class action litigation or the

right to classwide arbitration.” 113 P.3d at 1103.

That court further held that the FAA does not

“preempt[] California law in this respect.” Id.

In reaching that conclusion, the Discover Bank

Court acknowledged that class-wide arbitration

necessarily requires a “greater degree of court

involvement” than traditional arbitration, and, in

fact, was better characterized as a “hybrid procedure

of classwide arbitration.” Jd. at 1106 (emphasis

added). Under that “hybrid procedure,” a “court

would have to make initial determinations regarding

certification and notice to the class, and if classwide

arbitration proceeds it may be called upon to exercise

a measure of external supervision in order to

safeguard the rights of absent class members to

adequate representation and in the event of dismissal

or settlement.” Jd. (quoting Keating v. Superior

Court, 645 P.2d' 1192, 1209 (Cal. 1982)).

Nevertheless, the “judicial intrusion” into private

arbitration was appropriate, the court concluded,

given the “important role of class action remedies in

California law.” Id.

Discover Bank disagreed with the rulings by other

courts that the “potential availability of attorney fees

to the prevailing party in arbitration or litigation

ameliorates the problem posed by such class action

waivers.” Jd. at 1109-10. In particular, the court

rejected the Fourth Circuit’s conclusion that the

availability of attorneys’ fees or other forms of

redress, including “informal resolution,” were

“adequate substitute[s]” for the “class action or

arbitration mechanism.” /d. at 1110 (disagreeing

with Snowden v. Checkpoint Check Cashing, 290 F.3d

631, 638 (4th Cir. 2002)).

Finally, the court rejected the argument that the

FAA mandated enforcement — notwithstanding

contrary state policies in favor of class actions

because “the FAA does not federalize the law of

unconscionability or related contract defenses except

to the extent that it forbids the use of such defenses

to discriminate against arbitration clauses.” Jd. at

1112-13. Because California law favored class-wide

litigation of certain consumer claims, the court

concluded that imposition of a similar preference in

favor of class-wide arbitration’ reflected no

“discrimination” against arbitration. Jd. at 1113.

The Ninth Circuit embraced Discover Bank's

analysis in Shroyer v. New Cingular Wireless Seruvs.,

Inc., 498 F.3d 976 (9th Cir. 2007). Writing for the

panel, Judge Reinhardt applied Discover Bank’s test

and found that a class waiver in an arbitration

agreement was unconscionable under California law

to resolve the claims of a plaintiff who sought to

represent a class of wireless phone consumers. Id. at

984-86. In doing so, the Ninth Circuit rejected

Cingular’s argument that its agreement to arbitrate

“does not deter customers from arbitrating individual

small-value claims” or “insulate Cingular from

liability” even though Cingular had agreed to pay the

full costs of arbitration and permitted recovery of

attorneys’ fees. Jd. at 986.

Finally, the Shroyer court rejected the argument

that the FAA preempted a finding that the agreement

to arbitrate was unenforceable because it concluded

that, as a blanket matter, “unconscionability is a

generally applicable contract defense [that] may be

applied to invalidate an arbitration agreement

without contravening § 2 of the FAA.” Id. at 988

(quoting Ting v. AT&T Corp., 319 F.3d 1126, 1150

n.15 (9th Cir. 2003)).

The First Circuit has likewise followed Discover

Bank in ruling that an agreement to arbitrate

individually was unenforceable with respect to

federal and state antitrust claims because it denied

consumers class-wide procedures. See Kristian v.

Comcast Corp., 446 F.3d 25, 59 (1st Cir. 2006). In

doing so, the First Circuit held that enforceability of

agreements to arbitrate is an issue of federal law

because “state contract law doctrines, by operation of

the FAA, become part of the federal substantive law

of arbitrability.” Jd. at 63.

A number of state courts of last resort have

followed Discover Bank’s and Shroyer’s basic

approach to the enforcement of arbitration

agreements under the FAA. Most recently, in Scott v.

Cingular Wireless, 161 P.3d 1000 (Wash. 2007) (en

banc), Washington’s Supreme Court held that all

class waivers in consumer arbitration agreements are

unenforceable because “class actions are a critical

piece of the enforcement of consumer protection law.”

Id. at 1006. The Scott Court also followed Discover

Bank in holding that state law “striking a class action

waiver in an arbitration clause does not violate the

FAA.” Id. at 1008.!

Three Justices dissented in Scott. They concluded

that the majority approach “disfavors arbitration,

contradicting the strong legislative public policy

favoring arbitration of disputes embodied in the

1 Applying Scott, the Ninth Circuit has held that “T-Mobile’s

class action waiver is substantively unconscionable, and

unenforceable, under Washington law,” Lowden v. T-Mobile

USA, Inc., ___ F.3d ___, 2008 WL 170279, at *5 (9th Cir. Jan.

22, 2008), and that the FAA “does not preempt Washington’s

unconscionability law,” id. at *7. In doing so, the Ninth Circuit

was presented with and declined “to follow the Third Circuit's

holding in Gay.” Jd. at *8.

Federal Arbitration Act.” Jd. at 1009 (Madsen, J.,

dissenting). The dissenters concluded that the

“refusal to enforce this agreement as written is,

without any doubt whatsoever, contrary to the

federal policy favoring arbitration” and contrary to

“the many courts that have rejected arguments that

class action waivers are substantively

unconscionable.” Jd. at 1014 (citing cases).?

b. In direct conflict with these cases, the Third

Circuit in Gay v. CreditInform,__ F.3d ___, 2007 WL

4410362 (3d Cir. Dec. 19, 2007), has ruled that state

unconscionability law is preempted by the FAA to the

extent that it would render individual arbitration of

consumer claims unenforceable.

In Gay, a Pennsylvania consumer who had entered

into a contract to purchase “credit repair services”

challenged the provision of her agreement that

required mandatory arbitration of any dispute “on an

individual basis not consolidated with any other

claim.” Jd. at *2. In spite of this agreement, Gay

filed a class action advancing claims under the

federal Credit Repair Organizations Act and the

Pennsylvania Credit Services Act. Jd. at *1. The

district court compelled arbitration of Gay’s claims.

On appeal, the Third Circuit affirmed. The court of

appeals emphasized that “[f]ederal law determines

whether an issue governed by the FAA is referable to

arbitration.” Jd. at *14 (alteration in original)

(quoting Harris v. Green Tree Fin. Corp., 183 F.3d

2 See also Muhammad v. County Bank, 912 A.2d 88, 99 (N.J.

2006) (following Discover Bank and holding that agreements to

arbitrate individually were unconscionable and unenforceable

under Section 2 of the FAA), cert. denied, 127 S. Ct. 2032 (2007);

accord Coady v. Cross Country Bank, 729 N.W.2d 732 (Wis. Ct.

App.), review denied, 737 N.W.2d 432 (Wis. 2007).

173, 178 (3d Cir. 1999)). As a “matter of pure federal |

common law,” the court saw “no reason to conclude

that the arbitration provision is unconscionable.” Id.

at *17 n.14. The Third Circuit acknowledged,

however, that “two Superior court panels recognized

that under Pennsylvania law, class actions are... of

great public importance as the essential vehicle for

vindicating consumer rights.” Jd. at *19 (citation and

internal quotation marks omitted). The court

explained, however, that “those cases are hardly the

end point of our unconscionability analysis because

we are concerned with the federal law that Congress

set forth in the FAA; the federal law is controlling

here and Pennsylvania law must conform with it.”

Id.3

Indeed, under binding precedent, “[w]hatever the

benefits of class actions, the FAA ‘requires piecemeal

resolution when necessary to give effect to an

arbitration agreement.” Jd. at *20 (alternation in

original, emphasis omitted) (quoting Moses H. Cone,

460 U.S. at 20). The Third Circuit explained that

although the “Pennsylvania cases are written

ostensibly to apply general principles of contract law,

they hold that an agreement to arbitrate may be

unconscionable simply because it is an agreement to

arbitrate.” Jd. Specifically, Pennsylvania uncon-

scionability law was preempted by the FAA because

the state decisions improperly “rely on the unique-

3The court also concluded that, under Virginia law, an

agreement to “arbitrate disputes on an individual basis” does

not “constitute an unconscionable bargain,” Gay, 2007 WL

4410362, at *17, because even where plaintiffs “lack the

procedural right to proceed as part of a class, they retain the

range of rights’ created by the relevant statute . . . ‘in individual

arbitration proceedings.” Jd. (quoting Johnson, 225 F.3d at

373).

ness of an agreement to arbitrate as a basis for a

state-law holding that enforcement would be

unconscionable.” Jd. (quoting Perry, 482 U.S. at 492

n.9).

As a result, the Third Circuit ruled that it would

not “apply state law” because to do so would

“interfere with the appropriate application of the

FAA.” Jd. at *21. The Gay Court noted that a

contrary conclusion could extend “to arbitration

provisions in all sorts of contracts between vendors of

goods and services on the one hand and consumers on

the other hand” and thus “result in a significant

narrowing of the application of the FAA.” Jd. The

Third Circuit rejected that course because “fi]f the

reach of the FAA is to be confined then Congress and

not the courts should be the body to do so.” Id.4

Other federal circuits likewise have rejected the

conclusion that individual arbitration denies

consumers the ability effectively to vindicate their

statutory claims even in cases involving relatively

small amounts. The analysis by these federal courts

conflicts directly with the California Supreme Court’s

and Ninth Circuit’s conclusions that individual

4 The Seventh Circuit has voiced similar skepticism about the

use of “unconscionability” as a means for avoiding arbitration

under the FAA. See Oblix, Inc. v. Winiecki, 374 F.3d 488, 491-92

(7th Cir. 2004) (rejecting on FAA grounds unconscionability

challenge to arbitration agreement under California law because

the state “routinely enforces limited warranties and other terms ©

found in form contracts” and “[i]f a state treats arbitration

differently, and imposes on form arbitration clauses more or

different requirements from those imposed on other clauses,

then its approach is preempted by § 2 [of the FAA]”).

arbitrations are ineffective in resolving small claims

by consumers.5

Thus, the Eleventh Circuit has held that a class

waiver is not substantively unconscionable in a

lawsuit involving claims based on small personal

loans under federal law and Georgia RICO law.

Jenkins v. First Am. Cash Advance of Ga., LLC, 400

F.3d 868, 878 (11th Cir. 2005), cert. denied, 546 U.S.

1214 (2006); see also Randolph v. Green Tree Fin.

Corp., 244 F.3d 814, 818 (11th Cir. 2001) (same). The

Jenkins Court explained that the denial of a class-

action mechanism was not unconscionable because

the availability of attorneys fees under the

arbitration agreement provided _ plaintiffs with

effective access to legal representation, and therefore

“arbitration agreements prohibiting class action relief

do not necessarily choke off the supply of lawyers

willing to pursue claims on behalf of debtors.” 400

F.3d at 878 (internal quotation marks omitted).

- The Eleventh Circuit’s ruling in Jenkins, in turn,

relied on the Fourth Circuit’s decision in Snowden v.

Checkpoint Check Cashing, 290 F.3d 631 (4th Cir.

2002). There, the Fourth Circuit enforced an

arbitration agreement and rejected the consumer's

claim that the agreement was unconscionable on the

alleged ground that “without the class action vehicle,

5 The First Circuit has noted the close relationship between

these methods of analysis because “the unconscionability

analysis always includes an element that is the essence of the

vindication of statutory rights analysis.” Kristian, 446 F.3d at

60 n.22; see Faber v. Menard, Inc., 367 F.3d 1048, 1053 (8th Cir.

2004) (applying “vindication of statutory rights” analysis to

assess unconscionability argument); Booker v. Robert Half Int,

Inc., 413 F.3d 77, 84 (D.C. Cir. 2005) (applying “vindication of

statutory rights” analysis to assess enforceability of arbitration

agreement applied to state law claims). -

[plaintiff] will be unable to maintain her legal

representation given the small amount of her

individual damages.” Id. at 638. The Fourth Circuit

explained that plaintiff's fears about the loss of her

legal representation were unfounded because

“Sajttorneys’ fees” were recoverable by a prevailing

plaintiff in arbitration. Jd. at 638-39. The court of

appeals further rejected the argument that “forcing

consumers .. . to arbitrate consumer protection |

claims [was] against public policy relating to

consumer protection.” Id. at 639.

The Fourth Circuit’s decision in Snowden expressly

followed the Third Circuit’s decision in Johnson v.

West Suburban Bank, 225 F.3d 366 (3d Cir. 2000). In

Johnson, the court of appeals, through Judge Becker,

explained that although individual arbitration of

consumer claims under the Truth in Lending Act

(“TILA”) “that might have been pursued as part of

class actions potentially reduces the number of

plaintiffs seeking to enforce the TILA against

creditors, arbitration does not eliminate plaintiff

incentives to assert rights under the Act.” Jd. at 374.

Accordingly, the FAA mandated enforcement of

individual arbitration. Jd. at 374-75. See also

Livingston v. Associates Fin., Inc., 339 F.3d 553, 559

(7th Cir. 2003) (following Johnson and Randolph and

compelling arbitration of agreement that precludes

“class action arbitration” of TILA claims).

c. Resolution of this conflict is of critical

importance because the enforceability of agreements

to arbitrate individually under the FAA is an issue

that affects the rights set forth in consumer

agreements entered into by individuals and

businesses across the country.

As noted, private agreements to arbitrate are

protected by federal law because they provide for a

lower-cost, streamlined means of resolving disputes

that benefits both individual consumers’ and

businesses. Indeed, “Congress, when enacting [the

FAA], had the needs of consumers, as well as others,

in mind.” Allied-Bruce Terminix Cos. v. Dobson, 513

U.S. 265, 280 (1995). Recognizing these benefits,

arbitration agreements are contained in countless

agreements between individual consumers and the

businesses that compete to provide them internet

service, cable service, banking and credit card

services, computers and software, and wireless and

wireline telephone service.

The decision below, however, adopts an

interpretation of the FAA that undermines the

enforceability of these ubiquitous agreements and

threatens the mutual benefits that they provide to

consumers and businesses. “Standard-form agree-

ments are a fact of life,” Oblix, Inc. v. Winiecki, 374

F.3d 488, 491 (7th Cir. 2004); they “reduce

transaction costs and benefit consumers because, in

competition, reductions in the cost of doing business

show up as lower prices,” Carbajal v. H&R Block Tax

Serus., Inc., 372 F.3d 903, 906 (7th Cir. 2004)

(Easterbrook, J.). As the Seventh Circuit has

explained, state law should not be permitted to trump

federal law in this area because “(t]he cry of

‘unconscionable!’ just repackages the tired assertion

that arbitration should be disparaged as second-class

adjudication.” Jd. Indeed, legal commentators have

explained that courts are applying new forms of

“unconscionability”’ doctrine in an effort to strike

down or rewrite agreements to arbitrate.®

6 See Michael G. McGuinness & Adam J. Karr, California’s

“Unique” Approach to Arbitration: Why This Road Less Traveled

Will Make All the Difference on the Issue of Preemption Under

the Federal Arbitration Act, 2005 J. Disp. Resol. 61, 62 (2005)

In this case, the district court and court of appeals

applied Shroyer and Discover Bank to hold that

individual arbitration of consumer disputes is

“unconscionable” under California law and that the

FAA’s liberal policy in favor of enforcing arbitration

agreements must give way to the requirements of

state law. Shroyer, 498 F.3d at 988; Discover Bank,

113 P.3d at 1106. Likewise, the Washington

Supreme Court and First Circuit both have followed

Discover Bank and refused to enforce agreements to

arbitrate that do not provide class procedures in

claims involving consumers. “See Kristian, 446 F.3d

at 59-60; Scott, 161 P.3d at 1006.

In direct conflict, the Third Circuit in Gay has ruled

that the enforceability of agreements to arbitrate is

an issue of federal law and state unconscionability

law cannot be used to avoid individual arbitration of

consumer claims. Gay, 2007 WL 4410362, at *21.

The Ninth Circuit, after expressly considering the

Third Circuit’s contrary analysis, “declined to follow

the Third’s Circuit’s holding in Gay.” Lowden, 2008

WL 170279, at *8 n.3.

Further, the suggestion that individual arbitration

is “unconscionable” likewise cannot be reconciled with

other decisions of the Third Circuit, as well as those

(“California has created a new brand of unconscionability. It is

far more demanding—and it is unique to arbitration.”); Susan

Randall, Judicial Attitudes Toward Arbitration and _ the

Resurgence of Unconscionability, 52 Buff. L. Rev. 185, 186 (2004)

(“increased receptivity to claims of unconscionability in the

context of arbitration agreements suggests judicial hostility to

arbitration”); Stephen J. Ware, Arbitration and Unconscion-

ability After Doctor’s Associates, Inc. v. Casarotto, 31 Wake

Forest L. Rev. 1001, 1034 (1996) (“Judicial decisions apply

unconscionability, and other common law doctrines, more

aggressively to arbitration agreements than to other

contracts.”).

of the Fourth, Seventh, and Eleventh Circuits. Each

of those federal circuits has held that that individual

arbitration is enforceable under the FAA in cases

involving small claims by consumers notwithstanding

the absence of.class-wide procedures of the sort

required by Shroyer and Discover Bank. See, e.g.,

Johnson, 225 F.3d at 373; Jenkins, 400 F.3d at 878;

Livingston, 339 F.3d at 559; Snowden, 290 F.3d at

638-39.

Resolution of this. conflict is of paramount

importance because, as noted, the FAA governs the

rights of tens millions of individuals and businesses

across the country that have adopted agreements to

arbitrate as an alternative to litigation in a broad

range of transactions affecting interstate commerce.

The enforceability of these agreements to arbitrate

individually has been, and is being, challenged across

the country based on Discover Bank and Shroyer,

decisions which attempt to mask “judicial hostility” to

individual arbitration under the cover of state-law

“unconscionability.”

The enforceability of these agreements should not

be made to depend on which of the competing

- interpretations of the FAA has been adopted by a

particular state or federal circuit. Accordingly, this

Court should grant review in this case to ensure the

uniform application of the FAA in an area of

fundamental practical importance.

Il. THE DECISION BELOW CONFLICTS WITH

THIS COURT’S PRECEDENT.

Review also is warranted because the decision

below conflicts with this Court’s decisions on the

fundamental relationship between the FAA and

state-law substantive and procedural policies.

a. As this Court’s decisions make plain, the FAA

“creates a body of federal substantive law

establishing and regulating the duty to honor an

agreement to arbitrate.” Moses H. Cone Mem17 Hosp.

v. Mercury Constr. Corp., 460 U.S. 1, 25 (1983).

Under the FAA, “any doubts concerning the scope of

arbitrable issues should be resolved in favor of

arbitration, whether the problem at hand is the

construction of the contract language itself or an

allegation of waiver, delay, or a like defense to

arbitrability.” Jd. at 24-25. That “liberal federal

policy favoring arbitration” remains applicable

“notwithstanding any state substantive or procedural

policies to the contrary.” Id. at 24.

To be sure, the FAA does not entirely displace

state-law contract principles. Rather, Section 2 of the

FAA provides that agreements to arbitrate “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. Thus, any treatment

of arbitration agreements that is different from all

other contracts is expressly forbidden, for “[a] state-

law principle that takes its meaning precisely from

the fact that a contract to arbitrate is at issue does

not comport with this requirement of § 2.” Perry, 482

U.S. at 493 n.9; see Doctor’s Assocs., 517 U.S. at 684;

687 (state law that required conspicuous disclosure of

arbitration agreement preempted because it gave

arbitration provisions a “suspect status”). Further, a

court may not rely upon a state-law rule that applies

to some, but not all, contracts as a basis for refusing

to enforce an agreement to arbitrate. See Southland

Corp. v. Keating, 465 U.S. 1, 16 n.11 (1984); Perry,

482 U.S. at 489-90.

b. Here, the Ninth Circuit’s ruling, which adopts

Shroyer, 498 F.3d at 984 — and with it Discover Bank,

113 P.3d at 1106 —- conflicts with this Court’s

decisions. It conflicts with Perry because it is based

upon the conclusion that an agreement to arbitrate is

unconscionable because it does not provide class-wide

procedures that might be available in litigation.

That, however, is precisely what Perry explained was

prohibited by the FAA: Reliance on the “uniqueness

of an agreement to arbitrate as a basis for a state-law

holding that enforcement would be unconscionable.”

482 U.S. at 493 n.9. It further conflicts with

Southland because it adopts a standard applicable

only to certain contracts, rather than a rule generally

applicable to “any contract,” as a basis for refusing to

enforce the parties’ agreement to arbitrate. See 465

U.S. at 16 & n.11.

In evaluating whether the FAA permits California

law to refuse enforcement of the parties’ agreement,

the Ninth Circuit never addressed whether Laster

could protect her rights under California law through

individual arbitration. See, eg., Shearson/Am.

Express, Inc. v. McMahon, 482 U.S. 220, 232 (1987)

(“the streamlined procedures of arbitration do not

entail any consequential] restriction on substantive

rights”). Indeed, the Ninth Circuit’s decision in

Shroyer makes plain that the availability of

attorneys’ fees and the payment of “the full cost of

arbitration” by the defendant are, in that court’s

view, not relevant to a determination whether

individual arbitration is unconscionable. 498 F.3d at

986. The court below followed Shroyer’s holding that

an agreement to arbitrate individual claims was

unconscionable based on the effect that it might have

on the actions of third parties. Jd. (asserting that few

plaintiffs would pursue claims on an _ individual

basis).

This Court, however, has explained that arbitration

agreements must be enforced without regard to any

effect on third parties. In Moses H. Cone, this Court

explained that “an arbitration agreement must be

enforced notwithstanding the presence of other

persons who are parties to the underlying dispute but

not to the arbitration agreement.” 460 U.S. at 20.

Likewise, in Dean Witter Reynolds, Inc. v. Byrd, this

Court held that principles of judicial efficiency must

give way to the parties’ agreement to arbitrate

because “federal law requires piecemeal resolution

when necessary to give effect to an arbitration

agreement.” 470 U.S. 213, 221 (1985) (internal

quotes omitted).

Nor can the decision below be justified on the

grounds, relied upon by Shroyer and Discover Bank,

that California law mandates the availability of class-

wide procedures for resolution of consumer claims

both in litigation and arbitration. See Shroyer, 498

F.3d at 988 (“[T]he 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”) (quoting Discover Bank, 113 P.3d at

1112). To be sure, a state law that singles out

arbitration for disfavored treatment directly violates

the FAA. Doctor’s Assocs., 517 U.S. at 687. Under

this Court’s precedent, however, states cannot employ

unconscionability principles to remake arbitration as

the mirror image of litigation. :

To the contrary, under the FAA, “parties are

generally free to structure their arbitration

agreements as they see fit,” and to “specify by

contract the rules under which that arbitration will

be conducted.” Volt, 489 U.S. at 479. The FAA favors

- 29

arbitration because it provides an alternative to

litigation: a party “trades the procedures and

opportunity for review of the courtroom for the

simplicity, informality, and expedition of arbitration.”

Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth,

Inc., 473 U.S. 614, 628 (1985). The FAA mandates

enforcement of an agreement to arbitrate even where

the procedures chosen by the parties are different

from those in litigation.

Insistence by states that arbitration replicate

litigation undermines the role of arbitration as an

alternative means of dispute resolution. Indeed, in

Discover Bank, the California Supreme Court

candidly acknowledged that its requirement of class-

wide procedures in arbitration involving consumers

would create a “hybrid” form of dispute resolution

that “would entail a greater degree of judicial

involvement than is normally associated with

arbitration.” 113 P.3d at 1106. Under the FAA,

Congress’ “clear intent” was “to move the parties to

an arbitrable dispute out of court and into arbitration

as quickly and easily as possible.” Moses H. Cone,

460 U.S. at 22 (emphasis added). State law cannot be

used to pull parties who have agreed to arbitrate

back into court.

In short, review also is warranted because the

decision below conflicts with this Court’s decision

explaining that the FAA does not permit state

contract law to condition enforcement of agreements

to arbitrate on the parties’ adoption of the procedures

already available in litigation. E.g., Perry, 482 U.S.

at 493 n. 9; Southland, 465 U.S. at 16 & n.11.

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

JAMES C. GRANT CARTER G. PHILLIPS*

SHELLEY M. HALL PAUL J. ZIDLICKY

STOKES LAWRENCE, P.S. PETER C. PFAFFENROTH

800 Fifth Avenue JAMES C. OWENS

Suite 4000 SIDLEY AUSTIN LLP

Seattle, WA 98104-3179 1501 K Street, N.W.

(206) 626-6000 Washington, D.C. 20005

(202) 736-8000

Counsel for Petitioners

January 23, 2007 * Counsel of Record

APPENDIX

APPENDIX A

UNITED STATES COURT OF APPEALS

NINTH CIRCUIT

[Filed Oct. 25, 2007]

No. 06-55010

JENNIFER L. LASTER; ANDREW THOMPSON; ELIZABETH

VOORHIES, on behalf of themselves and all others

similarly situated and on behalf of the general

public,

Plaintiffs-Appellees,

Vv.

T-MOBILE USA, INC.; OMNIPOINT COMMUNICATIONS,

INC., a Delaware corporation dba T-MOBILE,

Defendants-Appellants,

And

VERIZON COMMUNICATIONS, INC., a Delaware cor-

poration; CELLCO PARTNERSHIP, a Delaware corpo-

ration dba VERIZON WIRELESS; VERIZON WIRELESS

(VAW) LLC, a Delaware limited liability company,

dba VERIZON WIRELESS; AIRTOUCH CELLULAR, a

Delaware limited liability company, dba VERIZON

WIRELESS; CINGULAR WIRELESS LLC, a Delaware

limited liability company; GO WIRELESS, a Cali-

fornia corporation; NEW CINGULAR WIRELESS PCS,

dba CINGULAR WIRELESS,

Defendants.

Submitted Oct. 16, 2007°

Appeal from the United States District Court for

the Southern District of California; Dana M. Sabraw,

District Judge, Presiding. D.C. No. CV-05-01167-

DMS.

Before: PREGERSON, HAWKINS, and FISHER,

Circuit Judges.

MEMORANDUM”

T-Mobile USA, Inc., Omnipoint Communications,

Inc., and TMO CA/NV, LLC (collectively, “Appel-

lants”) appeal from the district court’s order denying

their motion to compel arbitration. We affirm.

Although Appellants argue that their arbitration

provision is not procedurally or substantively uncon-

scionable under California law, the Appellants’ agree-

ment—which requires customers to waive class

action and bring claims only in an _ individual

capacity—is not substantively distinguishable from

the Cingular arbitration agreement this court held

unconscionable in Shroyer v. New Cingular Wireless

Servs., Inc., 498 F.3d 976, 2007 WL 2332068, at *5-9

(9th Cir. 2007).

Appellants argue their agreement is not proce-

durally unconscionable because customers accepted

the arrangement from the outset and could have

elected a different mobile phone company; however,

* The panel unanimously finds this case suitable for decision

without oral argument. See Fed. R. App. P. 34(a)(2).

“ This disposition is not appropriate for publication and is not

precedent except as provided by Ninth Circuit Rule 36-3.

this court specifically rejected the “marketplace

alternatives” rationale in Shroyer, id. at *7-8, and

California courts have done the same, Gatton v.

T-Mobile USA, Inc., 152 Cal. App. 4th 571, 582-85

(2007).

Shroyer also expressly and conclusively rejected

the argument that California law is preempted by the

Federal Arbitration Act (“FAA”), 498 F.3d 976, 2007

WL 2332068, at *9-15, and we lack the authority to

revisit the decision of a prior three-judge panel.

Miller v. Gammie, 335 F.3d 889, 899-900 (9th Cir.

2003) (en banc). Appellants’ attempts to circumvent

this rule are unavailing, as this is not a case where

the prior panel simply assumed California law

applied without discussing the preemptive effect of

the FAA. Cf. Sakamoto v. Duty Free Shoppeis.. Ltd.,

764 F.2d 1285, 1288 (9th Cir. 1985) (prior panel

assumed Commerce Clause applied to Guam without

discussing the issue); Matter of Baker, 693 F.2d 925,

925-26 (9th Cir. 1982) (prior panel exercised jurisdic-

tion and parties did not contest the issue). Even if

Shroyer did not address the specific arguments

Appellants would like to make, there is no doubt that

it clearly and explicitly ruled on the contested pre-

emption issue.

AFFIRMED. —

APPENDIX B

UNITED STATES DISTRICT COURT

S.D. CALIFORNIA

No. 05 CV 1167 DMS(AJB)

JENNIFER L. LASTER; et al.,

Plaintiffs,

T-MOBILE USA, INC., et al.,

Defendants.

Nov. 30, 2005

ORDER: (1) DENYING T-MOBILE AND

CINGULAR WIRELESS’ MOTION TO COMPEL

ARBITRATION AND TO STAY PROCEEDINGS; (2)

GRANTING DEFENDANTS’ MOTION TO DISMISS

PLAINTIFFS’ UCL AND FAL CLAIMS WITHOUT

PREJUDICE; AND (3) GRANTING DEFENDANTS’

MOTION TO DISMISS PLAINTIFFS’ CLRA CLAIM

FOR DAMAGES WITH PREJUDICE

[Docs. Nos. 24, 28, 32, 36]

SABRAW, District Judge.

In this putative class action, Plaintiffs assert that

Defendants—cellular phone companies and other en-

tities involved with the sale of wireless telecom-

munication services—have engaged in the unfair and

deceptive practice of charging consumers sales tax on

the full retail value of cellular phones that were

advertised as “free” or at substantial discounts, in

violation of California’s Unfair Competition Law

(“UCL”), Cal. Bus. & Prof.Code § 17200, et. seqg., and

False Advertising Law (“FAL”), Cal. Bus. & Prof.

Code § 17500, et. seg. In addition, based on these

alleged violations, Plaintiffs seek damages and

injunctive relief under the Consumer Legal Remedies

Act (“CLRA”), Cal. Civ.Code § 1770, et. seq.

Presently before the Court are two motions. First,

Defendants T-Mobile USA, Inc. (“T-Mobile”) and

Cingular Wireless (“Cingular”) have filed separate

motions to compel Plaintiffs Jennifer L. Laster

(“Laster”) and Elizabeth Voorhies (“Voorhies”) to

arbitration, based on the arbitration clauses con-

tained in their wireless service contracts. In

addition, Defendants Verizon Wireless and Go Wire-

less, Inc. have filed a joint motion under Fed.R.Civ.P.

12(b)(6) to dismiss Plaintiffs’ First Amended Class

Action Complaint (“FAC”) for failure to state a claim.

Defendants T-Mobile and Cingular have joined that

motion. On October 28, 2005, the Court heard oral

argument on both motions. For the reasons dis-

cussed below, the Court denies T-Mobile and

Cingular’s motions to compel arbitration, and grants

Defendants’ collective motion to dismiss Plain-

tiffs’ UCL and FAL claims without prejudice. Fur-

ther, the Court grants Defendants’ motion to dismiss

Plaintiffs’ CLRA damages claim with prejudice.

I. .

FACTUAL AND PROCEDURAL BACKGROUND

Defendants are engaged in the business of market-

ing and selling wireless telecommunications prod-

ucts, including cellular phones, accessories and

service. These products are often sold as part of

a “bundled” transaction, whereby the consumer

receives a free or significantly discounted cellular

phone, in exchange for agreeing to a wireless service

contract for a specified duration; however, when

Defendants offer the free or substantially discounted

phone as part of a bundled transaction, they gen-

erally charge consumers sales tax (approximately

7.75%) based on the full retail value of the phone.

Plaintiffs contend this practice is improper because a

phone advertised as “free” should not include sales

tax, and a phone advertised at a substantial discount

should include only the sales tax based on the

phone’s discounted price, rather than its full retail

value.

On November 14, 2004, Voorhies entered into

bundled transaction to obtain a new cellular phone

and wireless service from Cingular, through its

authorized agent, Go Wireless, in Poway, California.

(Plaintiffs’ FAC at { 5.) In conjunction with the

purchase of the service package, Voorhies was not

charged any amount for the phone. (/d.) However,

Defendants charged Voorhies a total of $10.31 in

sales tax, based on the retail value of the phone. (Jd.)

At the time Voorhies entered into the transaction,

she was provided with a copy of Cingular’s one page

“Wireless Service Agreement,” which provides in its

“Contract Provisions” section:

This Agreement includes all the provisions of

Cingular’s current [Tlerms of [SJervice form

FMS TC P 1104 0055 E, incorporated herein by

reference, including a binding arbitration clause.

It also includes and incorporates additional

provisions contained in a separate rate plan or

other brochure(s) describing the services to

which I subscribed (“Rate Plan Brochure”).

I agree to all these contract provisions.

(See Green Decl. at (J 6 & 7; Service Agreement,

attached thereto) (emphasis added).

wie

The Service Agreement further provides:

I HAVE READ, UNDERSTAND, AND AGREE

TO BE BOUND BY THIS AGREEMENT WITH

ITS TERMS OF SERVICE AND RATE PLAN

BROCHURE (including Changes to Terms and

Rates, Limitation of Liability and Arbitration).

(See id.) (emphasis added).

Voorhies also received at that time a copy of

Cingular’s “Terms of Service,” which is a thirteen

page document detailing the terms and conditions of

Cingular’s service. (Green Decl. at § 10.) The Terms

of Service, at page 10, includes a section entitled

“Arbitration,” which purports to waive the con-

sumer’s rights to (a) file claims in a court of law

against Cingular, and (b) participate in a class action

lawsuit against Cingular. Specifically, Cingular’s

arbitration clause provides:

CINGULAR and you ... agree to arbitrate all

disputes and claims (including ones that already

are the subject of litigation) arising out of or

relating to this Agreement, or to any prior oral or

written agreement, for Equipment or services

between CINGULAR and you ....A party who

‘intends to seek arbitration must first send to the

other, by certified mail, a written Notice of Intent

to Arbitrate (“Notice”) .... If we do not reach

agreement to resolve the claim within 30 days

after the Notice is received, you or Cingular

may commence an arbitration proceeding. After

Cingular receives notice at the Arbitration Notice

Address that you have commenced arbitration, it

will promptly reimburse you for your payment of

the filing fee. . . . Cingular will pay all [American

Arbitration Association] filing, administration

and arbitrator fees for any arbitration initiated

in accordance with the notice requirements above

... . If the arbitrator grants relief to you that

is equal to or greater than the value of your

Demand, Cingular shall reimburse you for your

reasonable attorneys’ fees and expenses in-

curred in the arbitration .... You agree that, by

entering into this Agreement, you and Cingular

are waiving the right to trial by jury .... 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. —

(Cingular’s Terms of Service at 10-12, attached to

Green Decl.) (emphasis in original).

After Voorhies received copies of the Wireless

Service Agreement and Terms of Service, she was—

pursuant to Cingular’s procedures for activation of

cellular service—directed to call a number provided

by Cingular for electronic activation of phone service.

(Green Decl. at J.11.) Voorhies was then prompted to

execute an electronic signature by selecting the “Yes”

option using her telephone keypad in response to the

statement: “You agree to the terms as stated in the

Wireless Service Agreement and Terms of Service.”

(Ud. at J 12.) If Voorhies did not respond “Yes” to this

question, the system would automatically decline

her service contract, and her phone would not be

activated. (/d.) Voorhies agreed to the terms, and

her phone was activated. (/d. at J 13.)

On February 23, 2005, Laster entered into a

bundled transaction with T-Mobile at its Mission

Valley Center Store in-San Diego, California,

whereby she purchased a new phone and activated

cellular service. (Plaintiffs’ FAC at | 3; Chang Decl.

at J 2.) When Laster entered into the transaction,

she signed a one page Service Agreement which

identified her plan rate and the equipment she

purchased. (Chang Decl. at J 2.) The Service Agree-

ment neither mentioned arbitration nor incorporated

by reference such a provision. After Laster signed

the agreement, she received a one page transaction

receipt which indicated, among other things, that

while T-Mobile did not charge any amount for the

phone, it was charging $28.22 for sales tax based on

the full retail value of the phone. (/d.)

In addition to receiving a new phone, Laster was

provided with a copy of T-Mobile's fifty-two page

“Welcome Guide”, which was placed inside the sealed

box accompanying her new phone. (Jd. at 3.) The

Welcome Guide includes information about the

phone’s features and service, as well as the “Terms

and Conditions” of its Service Agreement. Similar to

Cingular, T-Mobile’s Terms and Conditions includes

an arbitration clause and waiver of class action

participation. T-Mobile’s arbitration clause provides:

Mandatory Arbitration; Dispute Resolution.

YOU WILL FIRST NEGOTIATE WITH U.S. IN

GOOD FAITH TO SETTLE ANY CLAIM OR

DISPUTE BETWEEN YOU AND U.S. IN ANY

WAY RELATED TO OR CONCERNING THE

AGREEMENT, OR OUR PROVISION TO

YOU OF GOODS, SERVICES OR UNITS

(CAIN... ss IF YOU DO NOT REACH

AGREEMENT WITH U.S. WITHIN 30 DAYS,

INSTEAD OF SUING IN COURT, YOU AGREE

THAT ANY CLAIM MUST BE SUBMITTED TO

FINAL, BINDING ARBITRATION WITH THE

10a

AMERICAN ARBITRATION ASSOCIATION

(“AAA”)... . You will pay your share of the

arbitrator's fees except: (a) for claims less than

$25, we will pay all arbitrator’s fees and (b) for

claims between $25 and $1000, you will pay $25

for the arbitrator’s fee. You and we agree to pay

our own other fees, costs and expenses including

those for counsel, experts, and witnesses. YOU

AND WE ACKNOWLEDGE AND AGREE THAT

THIS SEC[TION] . . . WAIVES ANY RIGHT

TO A JURY TRIAL, OR PARTICIPATION AS

A PLAINTIFF OR A CLASS MEMBER IN A

CLASS ACTION.

(T-Mobile’s Welcome Guide, § 4 (Terms and Condi-

tions) at {J 3 & 4, attached as Exhibit D to Chang

Decl.) (emphasis in original). Laster alleges that

before receiving T-Mobile’s Welcome Guide, she was

unaware of T-Mobile’s arbitration clause. (Plaintiffs’

Opposition to T-Mobile’s Motion to Compel at 7.)

In May of 2005, Laster, Voorhies, and an additional

named Plaintiff in this lawsuit, Andrew Thompson,

each filed suits in the Superior Court of San Diego

County. Subsequently, two of the cases were

removed to this Court pursuant to the Class Action

Fairness Act of 2005 (““CAFA”), 28 U.S.C. §§ 1711,

et. seq. The third action against Defendants was

dismissed without prejudice.

On August 12, 2005, Plaintiffs filed their FAC with

this Court against Defendants. Plaintiffs allege for

themselves and on behalf of all consumers who pur-

chased a cellular phone as part of a bundled transac-

tion, that Defendants’ practice of advertising “free” or

significantly discounted phones, while charging sales

tax on the full retail value of the phones, constitutes

misleading and unlawful business acts and practices

lla :

under California’s FAL, UCL and CLRA. Defendants

challenge the FAC through their motions to com-

pel arbitration and to dismiss. These motions are

addressed below.

IT.

DISCUSSION

A. Motion to Compel Arbitration

1. Legal Standard

The Federal Arbitration Act (“FAA”) governs

arbitration agreements in contracts involving trans-

actions in interstate commerce. 9 U.S.C. § 1; Moses

H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460

U.S. 1, 25 n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).

Congress intended courts to construe commerce as

broadly as possible. Simula, Inc. v. Autoliv, Inc., 175

F.3d 716, 719 (9th Cir.1999). Pursuant to Section 2

of the FAA, arbitration agreements “shall be valid,

irrevocable, and enforceable, save upon such grounds

that exist at law or in equity for the revocation of any

contract.” 9 U.S.C. § 2. In determining whether to

compel a party to arbitration, a district court may not

review the merits of the dispute; rather, the court

must limit its inquiry to: (1) whether a valid agree-

ment to arbitrate exists, and, if it does (2) whether

the agreement encompasses the dispute at issue.

Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d

1126, 1130 (9th Cir.2000). Finally, a court inter-

preting an arbitration agreement must give due

regard to the federal policy favoring arbitration;

ambiguities as to the scope of the arbitration clause

are resolved in favor of arbitration. Mastrobuono v.

_ Shearson Lehman Hutton, Inc., 514 U.S. 52, 62, 115

S.Ct. 1212, 131 L.Ed.2d 76 (1995); AT & T Techs. Inc.

v. Comm. Workers of America, 475 U.S. 643, 650, 106

12a

S.Ct. 1415, 89 L.Ed.2d 648 (1986) (“in the absence of

any express provision excluding a particular griev-

ance from arbitration . . . only the most forceful

evidence of a purpose to exclude the claim from

arbitration can prevail.”)

T-Mobile and Cingular contend Laster and Voor-

hies are bound by the terms of the arbitration

agreements contained in their wireless service

agreements, and therefore, this Court is not the

proper forum to adjudicate their claims. Laster and

Voorhies respond by arguing that the arbitration

clauses are not enforceable against them because the

_ subject provisions are unconscionable.

2. Unconscionability

While federal policy favors arbitration agreements,

federal courts rely on state law when addressing

issues of contract validity and enforceability. Ticknor

v.. Choice Hotels Int'l, Inc., 265 F.3d 931, 936-37

(9th Cir.2001). Thus, generally applicable contract

defenses such as fraud, duress, or unconscionability,

may be applied to invalidate arbitration agreements

without contravening Section 2 of the FAA. Ticknor,

265 F.3d at 937 (citing Doctor’s Assocs., Inc. v.

Casarotto, 517 U.S. 681, 686, 116 S.Ct. 1652, 134

L.Ed.2d 902 (1996)). On a motion to compel ar-

bitration, the trial court does not determine whether

the contract as a whole is unconscionable. Instead,

the court is limited to determining whether the

arbitration clause itself is unconscionable. See Gray

v. Conseco, Inc., 2000 WL 1480273 (C.D.Cal.2000).

The unconscionability analysis begins with an

inquiry into whether the contract is one of adhesion.

See Armendariz v. Foundation Health Psychcare

Services, 24 Cal.4th 83, 113, 99 Cal.Rptr.2d 745, 6

13a

P.3d 669 (Cal.2000). An adhesion contract is a

“standardized contract, which, imposed and drafted

by the party of superior bargaining strength, rele-

gates to the subscribing party only the opportunity to

adhere to the contract or reject it.” Id. at 113, 99

Cal.Rptr.2d 745, 6 P.3d 669 (citation omitted). An

adhesion contract is unconscionable when both

procedural and substantive unconscionability are

present. Id. at 114, 99 Cal.Rptr.2d 745, 6 P.3d 669.

Procedural and substantive unconscionability, how-

ever, “need not be present in the same degree.” Id.

When great substantive unconscionability is present,

less procedural unconscionability is required before

the agreement will be invalidated. Jd. Finally, 1

party challenging an arbitration agreement has the

burden to prove both procedural and substantive

unconscionability. Crippen v. Central Valley RV Out-

let, Inc., 124 Cal.App.4th 1159, 1166, 22 Cal.Rptr.3d

189 (2004).

a. Procedural Unconscionability

Procedural unconscionability concerns the manner

in which the contract was negotiated and the cir-

cumstances of the parties at that time. A & M

Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 491,

186 Cal.Rptr. 114 (1982). The procedural element of

unconscionability focuses on two factors: oppression

and surprise. Id. at 486, 186 Cal.Rptr. 114. The

oppression component arises from an inequality of

bargaining power of the parties to the contract and

an absence of real negotiation or.a meaningful choice

on the part of the weaker party. California Grocers

Assn. v. Bank of America, 22 Cal.App.4th 205, 214, 27

Cal.Rptr.2d 396 (1994). “Surprise involves the extent

to which the terms of the bargain are hidden in a

‘prolix printed form’ drafted by a party in a superior

l4a

bargaining position.” Crippen, 124 Cal.App.4th at

1165, 22 Cal. Rptr.3d 189 (citation omitted).

T-Mobile and Cingular do not dispute that the

arbitration agreements between the parties were part

of a non-negotiable form contract. Further, they do

not challenge Plaintiffs’ argument that a disparity in

bargaining power exists between the parties. How-

ever, T-Mobile and Cingular argue that Laster and

Voorhies cannot establish that the agreements are

procedurally unconscionable due to “oppression” be-

cause they were not compelled to accept the terms

contained in the. service contracts; Laster and

Voorhies were “able to choose from a host of wireless

carriers offering services in a given market”—

including carriers that do not insist on arbitration of

disputes. (T-Mobile’s Motion to Compel at 10-11;

Cingular’s Motion to Compel at 7.) Defendants cite

Morris v. Redwood Empire Bancorp, 128 Cal.App.4th

1305, 1319-20, 27 Cal.Rptr.3d 797 (2005), for the

proposition that “the ‘oppression’ factor of the proce-

dural element of unconscionability may be defeated,

if the complaining party has a meaningful choice of

reasonably available sources of supply from which to

obtain the desired goods and services free of the

terms claimed to be unconscionable.” (Cingular’s

Motion to Compel at 6.) The problem with this

argument, however, is that the Ninth Circuit has

rejected it.

In Ting v. AT&T, 319 F.3d 1126, 1149 (9th

Cir.2003), the Ninth Circuit addressed this very

argument. There, AT & T mailed a Consumer

Services Agreement (CSA) to its customers along

with the customer's monthly bill and other materials.

The CSA purported to mandate arbitration of claims

and bar customers from pursuing claims against AT

15a

& T on a classwide basis. AT & T argued its

arbitration provision in the CSA was not procedurally

unconscionable because “the third largest carrier,

Verizon, had no arbitration agreement in [its] con-

tract and .. . consumers therefore had the option of

rejecting AT & T’s CSA and switching to a com-

petitor.” Id. at 1149.

The court in Ting dismissed the argument, first

noting: “A contract is procedurally unconscionable if

it is a contract of adhesion, i.e., a standardized con-

tract, 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 1148-49 (emphasis added) (cit-

ing Flores v. Transamerica HomeFirst, Inc., 93

Cal.App.4th 846, 853, 113 Cal.Rptr.2d 376 (2001) (“A

finding of a contract of adhesion is essentially a

finding of procedural unconscionability.”)) In addi-

tion, the court in Ting held: “[E]ven assuming such

alternatives matter under California law, see

Armendariz, . . . (rejecting contention that avail-

ability of alternative sources of supply affected the

procedural unconscionability analysis), it nonetheless

fails to overcome the district’s court’s well-founded

conclusion that the CSA is a procedurally uncon-

scionable contract [because AT & T imposed the CSA

on its customers without opportunity for negotiation,

modification, or waiver].” Jd. Accordingly, Ting

holds: (1) a contract of adhesion is procedurally

unconscionable, and (2) even if a court were to

consider the availability of alternative sources of

supply, the court must evaluate the consumer's

opportunity to negotiate the arbitration provision.

Here, it is undisputed Laster and Voorhies were

presented with non-negotiable form contracts. They

16a

could either accept the contract with arbitration, or

reject it. Under Ting, such “take it, or leave it” con-

tracts are deemed to be procedurally unconscionable

contracts of adhesion. The only question for this

Court, therefore, is where on the continuum of

procedural unconscionability do the subject agree-

ments fall?’

With respect to T-Mobile, the one page Service

Agreement Laster signed does not include any

reference to arbitration or waiver of class action

participation. Rather, Laster was theoretically noti-

fied of the arbitration clause through T-Mobile’s fifty-

two page “Welcome Guide”, which was placed inside

the sealed box containing her new phone. Laster

claims she neither signed nor acknowledged the

arbitration provision, because she never knew it

existed. (Opposition to Motion to Compel at 7.)

Nevertheless, T-Mobile contends Laster accepted the

terms of arbitration by activating her phone because

she “had: time to review and understand” the

Welcome Guide and its arbitration provision, and

“she was allowed to return her phone and cancel her

T-Mobile service within 14 days, with no penalty.”

(T-Mobile’s Motion to Compel at 4.)

Under these circumstances, Laster had no mean-

ingful opportunity to negotiate the terms of the

* Defendants cite Crippen, 124 Cal.App.4th at 1165, 22

Cal.Rptr.3d 189, for the proposition that “there is no general

rule that a form contract used by party for many transactions

is procedurally unconscionable. Rather, ‘[pJrocedural uncon-

scionability focuses on the manner in which the disputed clause

is presented to the party in the weaker bargaining position.”

(citation omitted). This holding, however, is contrary to the

holding in Ting. Nonetheless, Crippen’s holding remains rele-

vant to the determination of the level of procedural uncon-

scionability.

17a

service contract before purchasing the phone. In

other words, she had no opportunity to switch to

another competitor until after she purchased the

phone. . On this record, it appears Laster’s ability to

“negotiate” depended upon her ability to discover the

arbitration provision on her own and then cancel her

service within 14 days of purchasing and activating

her phone. The manner in which the T-Mobile’s

arbitration provision was presented to Laster clearly

suggests procedural unconscionability at a height-

ened level. oe

Cingular’s arbitration clause, on the other hand,

presents a closer call. In contrast to Laster, Voorhies

was provided with both Cingular’s Service Agreement

(which specifically references arbitration) and its

phone. As Cingular notes, “At that time, Voorhies

had neither invested in a telephone nor become

reliant upon the telephone number obtained when

she entered into her agreement.” (Cingular’s Motion

to Compel at 8.) In other words, Voorhies could, at

that point, elect to “leave it” and go with a com-

petitor, such as Verizon.

However, under Ting, Cingular nonetheless pre-

sented Voorhies with a_ take-it-or-leave-it form

contract that is deemed to be adhesive and thereby,

procedurally unconscionable. Similar to Laster,

Voorhies had no real opportunity to “negotiate” the

arbitration provision, as it was non-negotiable. She

was, however, able to negotiate the transaction in the

sense that she could at an early stage reject Cin-

gular’s terms and choose a competitor. As Cingular

concedes, “At most, [under these circumstances]

adhesiveness . . . puts Cingular’s contracts on the low

end of the spectrum of procedural! unconscionability.”

18a

(Cingular’s Motion to Compel at 7.) This Court would

agree.

T-Mobile and Cingular next argue that Laster and

Voorhies fail to show the “surprise” element of

procedural unconscionability. In support, Defendants

argue the terms of the arbitration agreements are

adequately disclosed in their service contracts.

(T-Mobile’s Motion to Compel at 11; Cingular’s

Motion to Compe! at 8.)

As noted, Laster was not made aware of the terms

of the arbitration clause until after she had pur-

chased the phone. The surprise element is therefore

clearly established by Laster against T-Mobile.

Cingular argues, however, the “surprise” element is

lacking because it “gave its arbitration provisions

special prominence in its [Service] Agreement.”

(Cingular’s Motion to Compel at 8.) While it is true

Cingular’s Service Agreement provides notice of

arbitration, the agreement fails to mention the terms

of arbitration or its classwide arbitration bar. In

addition, the actual arbitration clause and class

action waiver can only be determined by the cus-

tomer by reading a separate document—specifically,

pages ten through twelve of Cingular’s thirteen page

therefore exists under these circumstances.

In sum, for the reasons stated, T-Mobile and

Cingular’s arbitration provisions are procedurally

unconscionable. To avoid enforcement, however,

Laster and Voorhies also must establish substantive

unconscionability.

19a

6. Substantive Unconscionability

Plaintiffs argue T-Mobile and Cingular's arbitra-

tion clauses are substantively unconscionable. be-

cause they include a waiver of class action rights,

_ citing the recent California Supreme Court decision

in Discover Bank v. Superior Court of Los Angeles, 30

Cal.4th 148 (Cal.2005). Defendants counter that: (1)

Discover Bank does not hold that all such arbitration

provisions are unconscionable; (2) under Discover

Bank’s test for substantive unconscionability, Plain-

tiffs fail to show the arbitration provisions in dispute

are unconscionable; and (3) even if this Court were to

conclude that Discover Bank invalidates class action

waivers in all consumer arbitration provisions, that

holding would be preempted by Section 2 of the FAA.

In Discover Bank, defendant, a credit card com-

pany, sent an arbitration agreement (as an amend-

ment to its existing customer service agreement) in a

“bill stuffer” along with its customers’ monthly

invoices. The arbitration agreement included a

waiver of classwide arbitration. Plaintiffs later

initiated a class action lawsuit, and Discover Bank

moved to compel arbitration. The California Su-.

preme Court held that a waiver of classwide

arbitration in a consumer contract of adhesion may

be unconscionable under certain circumstances.

Specifically, the court concluded:

We do not hold that all class action waivers

are necessarily unconscionable. But when the

waiver is founc 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

20a

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 cir-

cumstances, such waivers are unconscionable

under California law and should not be enforced.

Discover Bank, 30 Cal.4th at 162-63.

Accordingly, under Discover Bank, arbitration

provisions that contain class action waivers are not

per se unconscionable. Instead, a classwide arbi-

tration bar is unconscionable only if two factors are

present: (1) the class action waiver is contained in

a consumer contract of adhesion, in which small

amounts of damages are at issue; and (2) 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.

Applying Discover Bank’s two-prong test to the

present facts leads to the conclusion that the

arbitration provisions are substantively unconscion-

able. As noted, the arbitration clauses are contracts

of adhesion because they are non-negotiable, pre-

senting the consumer with only a take-it-or-leave-it -

option. Further, the dispute between the parties here

involves individually small amounts of money—that

is, the sales tax (approximately 7.75%) charged to the

consumer, based on the retail value of a cellular

phone. Thus, the first prong of Discover Bank’s

unconscionability test is satisfied.

2la

T-Mobile argues Plaintiffs do not prevail under the

second prong of Discover Bank because they fail to

show T-Mobile deliberately cheated large numbers of

consumers out of individually small sums of money.

(T-Mobile’s Motion to Compel at 16.) Discover Bank,

however, does not require a plaintiff to show that a

defendant actually carried out a scheme to cheat

consumers out of money. Instead, Discover Bank

holds that, “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 . . . 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.”

Discover Bank, 30 Cal.4th at 162-63. (emphasis

added). In essence, for a classwide litigation bar to

be considered substantively unconscionable, a plain-

tiff need only allege that a defendant engaged in a

scheme to cheat consumers out of small sums of

money. Here, Plaintiffs’ allege Defendants’ practice

of advertising “free” or substantially discounted

phones, while charging consumers sales tax on the

full retail value of the phone, constitutes a scheme to

mislead consumers. Accordingly, their allegations

are sufficient to satisfy the second prong of Discover

Bank’s substantive unconscionability test.

Cingular raises the additional argument that

because its arbitration provision provides for the full

payment of arbitration costs, as well as reasonable

attorneys fees to potential plaintiffs, “the class-

action waiver in its arbitration provision does not

serve to insulate [it] from liability that otherwise

would be imposed under California law’. . . and hence

is not substantively unconscionable under Discover

Bank.” (Cingular’s Motion to Compel at 9-10,13.)

22a

Thus, Cingular essentially argues its arbitration

provision allows potential plaintiffs to pursue claims

against them under a system where the parties are

on equal footing; because Cingular would pay a

prevailing plaintiffs attorney’s fees, it would have no

incentive to defend itself in arbitration against a

meritorious claim. (Jd. at 12.)

The court in Discover Bank considered this

argument, and rejected it, holding: “Nor are we

persuaded by the rationale stated by some courts

that the potential availability of attorney fees to

the prevailing party in arbitration or litigation

ameliorates the problem posed by such class action

waivers .... There is no indication . . . attorney fees

are an adequate substitute for the class action or

arbitration mechanism.” Discover Bank, 30 Cal.4th

at 162.

Because T-Mobile and Cingular’s service contracts

are non-negotiable form contracts, involving an

* The court in Ting, 319 F.3d 1126, which presaged Discover

Bank, also was concerned with classwide bars because such bars

potentially could convert arbitration into a one-sided forum

favoring the stronger party. “Although parties are free to

contract for asymmetrical remedies and arbitration clauses of

varying scope .. . the doctrine of unconscionability limits the

extent to which a stronger party may, through a contract of

adhesion, impose the arbitration forum on the weaker party

without accepting that forum for itself.” Id. at 1149 (citing

Armendariz, 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669)

(emphasis added). Because credit card companies typically do

not sue their customers in class-action lawsuits, the Ting court

concluded the classwide bar provision was manifestly one-sided

and thus, substantively unconscionable. Jd. at 1150. The Ting

court’s warning that such provisions may not be sufficiently

bilateral, permeates Discover Bank’s reasoning in its rejection of

the classwide bar provision it was analyzing.

23a

alleged scheme to cheat large numbers of consumers

out of small sums of money, the arbitration. clauses

are substantively unconscionable. Further, because

Laster and Voorhies have established the arbitration

provisions are both procedurally and substantively

unconscionable to a sufficient degree, the Court

concludes the provisions are not enforceable against

them.°

3. Preemption

T-Mobile and Cingular argue, in the alternative,

that should the Court find the arbitration clauses

substantively unconscionable, this Court still must

compel Laster and Voorhies to arbitration because

the holding in Discover Bank is preempted by

the FAA. Section 2 of the FAA provides that “[a]n

agreement shall be valid, irrevocable, and enforce-

able, save upon such grounds that exist at law or in

equity for the revocation of any contract.” 9 U.S.C.

§ 2. (emphasis added). Likewise, in Perry v. Thomas,

482 U.S. 483, 492-93 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d

426 (1987), the United States Supreme Court held

that “an agreement to arbitrate is valid, irrevocable,

and enforceable, as a matter of federal law, save upon

such grounds as exist at law or in equity for

the revocation of any contract.” (emphasis added.)

T-Mobile and Cingular argue that “because the test

set forth in Discover Bank is not a rule of general

applicability given that it only applies to a limited

subset of arbitration agreements and disputes”—the

unconscionability test articulated in Discover Bank is

° In light of the holding that Defendants’ arbitration clauses |

are not‘ enforceable, the Court declines to address the argu-

ments regarding the scope of the arbitration clauses.

24a

preempted by § 2 of the FAA. (T-Mobile’s Motion to

Compel at 17; Cingular’s Motion to Compel at 13.)

In Discover Bank, the court noted a determination

that a classwide bar is unconscionable is not

preempted by § 2 of the FAA, because such a

determination involves principles of state law regard-

ing the “validity, revocability, and enforceability of

contracts generally[.]” Discover Bank, 30 Cal.4th at

165. “Under section 2 of the FAA, a state court may

refuse to enforce an arbitration agreement based on

generally applicable contract defenses, such as fraud,

duress, or unconscionability.” Jd. (citations omitted.)

See also Ting, 319 F.3d at 1150, n. 15 (“Because

unconscionability is a generally applicable contract

defense, it may be applied to invalidate an

arbitration agreement without contravening § 2

of the FAA.”). The concept of unconscionability,

therefore, may be employed as a principle of general

applicability to invalidate an arbitration agreement

without contravening § 2 of the FAA. Accordingly, the

holding of Discover Bank is not preempted by § 2 of

the FAA. —

B. Motion to Dismiss

1. Legal Standard

- Under Federal Rule of Civil Procedure 12(b)(6), a

district court must dismiss a complaint if it fails to

state a claim upon which relief can be granted. The

question presented by a motion to dismiss is not

whether the plaintiff will prevail in the action, but

whether the plaintiff is entitled to offer evidence in

support of the claim. -Fed.R.Civ.P. 12(b)(6). See

Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683,

40 L.Ed.2d 90 (1974), overruled on other grounds by

Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012, 82

25a .

L.Ed.2d 139 (1984). In answering this question, the

Court must assume that the plaintiffs allegations are

true and must draw all reasonable inferences in

plaintiffs favor. See Usher v. City of Los Angeles, 828

F.2d 556, 561 (9th Cir.1987). Even if the face of the

pleadings suggests that the chance of recovery is

remote, the Court must allow the plaintiff to develop

the case at this stage of the proceedings. See United

States v. City of Redwood City, 640 F.2d 963, 966 (9th

Cir.1981). If the Court dismisses the complaint, it

must then decide whether to grant leave to amend.

The Ninth Circuit has “repeatedly held that a district

court should grant leave to amend even if no request

to amend the pleading was made, unless it de-

termines that the pleading could not possibly be

cured by the allegation of other facts.” Lopez uv.

Smith, 203 F.3d 1122, 1130 (9th Cir.2000) (citations

and internal quotation marks omitted).

Defendants seek dismissal of Plaintiffs’ FAC on

four grounds: (1) Plaintiffs lack standing to bring

their claims under California’s UCL and FAL because

they fail to adequately plead actual reliance and

injury in fact; (2) Plaintiffs. cannot allege false or

deceptive advertising as a matter of law because

consumers are expected to know that California law

requires sales tax to be added to advertised items;

(3) Plaintiffs’ claim for restitution under the UCL and

FAL fails because Defendants remitted the taxes

collected from consumers to the State Board of

Equalization; and (4) Plaintiffs’ claim for damages

under the CLRA should be dismissed because they

fail to allege proper notice of their claim as required

by California Civil Code § 1782. These arguments

are addressed below.

26a

2. Plaintiffs’ UCL and FAL Claims

Section 17200 of the California Business and

Professions Code defines “unfair competition” as “any

unlawful, unfair or fraudulent business act or

practice and unfair, deceptive, untrue or misleading

advertising and any act prohibited by [the FAL)].”

Cal. Bus. & Prof. § 17200. By defining unfair

competition to include any “unlawful . . . business act

or practice”, the UCL permits violations of other laws

to be treated as unfair competition that are

independently actionable. Cel-Tech Communications,

Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th

163, 180, 83 Cal. Rptr.2d 548, 973 P.2d 527

(Cal.1999). As such, any violation of the FAL neces-

sarily violates the UCL. Committee on Children’s

Television, Inc. v. General Foods Corp., 35 Cal.3d 197,

210, 197 Cal.Rptr. 783, 673 P.2d 660 (Cal.1983).

The FAL, which is codified at Section 17500,

provides: “[i]t is unlawful for any person . . . cor-

poration or association, or any employee thereof...

to disseminate or cause to be so made or dis-

seminated [,] any such statement as part of a plan or

scheme with the intent not to sell that personal

property or those services, professional or otherwise,

so advertised at the price stated therein, or as so

advertised.” Cal. Bus. & Prof. § 17500. California

courts have noted that the FAL prohibits “not only

advertising which is false, but also advertising which

[,] although true, is either actually misleading or

which has a capacity, likelihood or tendency to

deceive or confuse the public.” Leoni v. State Bar, 39

Cal.3d 609, 626, 217 Cal.Rptr. 423, 704 P.2d 183

(Cal.1985).

Proposition 64, which was approved by California

voters on November 2, 2004, amended certain provi-

27a

sions of the UCL and FAL. Before Proposition 64

passed, an uninjured private party could bring a UCL

(or FAL) action on behalf of the “general public,” and

could obtain remedies on behalf of non-parties.

Proposition 64, however, amended Section 17204

of the UCL regarding private plaintiffs to read:

“Actions for any relief pursuant to this chapter shall

be prosecuted exclusively .. . by any person who has

suffered injury in fact and has lost money or property

as a result of such unfair competition.” Cal. Bus. &

Prof.Code § 17204. Section 17203, which was also

- amended by Proposition 64, now provides, with

respect to representative private plaintiffs: “Any

person may pursue representative claims or relief on

behalf of others only if the claimant meets the

standing requirements of Section 17204 and os

with Section 382 of the Code of Civil Procedure. .

Cal. Bus. & Prof.Code § 17203.

Accordingly, after Proposition 64, a person seeking

to represent claims on behalf of others must show

that (1) she has suffered actual injury in fact, and (2)

such injury occurred as a result of the defendant’s

alleged unfair competition or false advertising. For

the reasons set forth below, Plaintiffs adequately

allege injury in fact, but fail adequately to allege

causation.

With respect to the first prong—injury in fact—

Plaintiffs claim they entered into a bundled trans-

action with Defendants whereby they purchased both

a phone and cellular service, and:in doing so, were

provided with a phone that was falsely advertised as

“free” or substantially discounted, when in fact, they

were required to pay the sales tax on the full retail

value. (FAC at 7¥ 23, 24, 25, 26 & 31.) Plaintiffs,

in essence, contend putative class members were

28a

injured by Defendants’ “bait-and-switch” practices;

that is, consumers were lured in with advertisements

for free or deeply discounted phones, yet once in the

store, they were charged sales tax based on the full

retail value of the phone. (FAC JJ 26 & 31.)

Plaintiffs further contend that if Defendants were

faithful to their advertisements, they would have

absorbed the tax. Instead, according to Plaintiffs,

Defendants illicitly shifted the tax burden to their

customers (“fleeced” them) once such customers had

taken the time and effort to respond to the deceptive

advertisements. (/d.) Such allegations sufficiently

allege an injury in fact.‘

Plaintiffs. however, do not include any allegations

in their FAC that they relied on Defendants’

advertisements in entering into the transactions.

While Plaintiffs meticulously describe the allegedly

misleading advertisements (as later described in

Plaintiffs’ pleadings, a “bait-and-switch” leading to a

“fleece”), none of the named Plaintiffs allege that

they saw, read, or in any way relied on the adver-

tisements; nor do they allege that they entered into

the transaction as a result of those advertisements.

* For these reasons, the Court also rejects Defendants’ argu-

ment that Plaintiffs cannot allege false or deceptive advertising

as a matter of law. See Defendants’ Motion to Dismiss at § IV.A,

where Defendants argue they were both required to calculate

sales tax on the full retail price of the phones irrespective of

any promotional discount and authorized te collect it from

consumers. This argument, however, overlooks the essence of

Plaintiffs’ claim, i.e., that Defendants engaged in “bait-and-

switch” practices that deceptively and unfairly shifted the tax

burden to consumers.

29a

The language of the UCL, as amended by Prop-

osition 64, makes clear that a showing of causation is

required as to each representative plaintiff. (“Actions

for any relief . . . shall be prosecuted exclusively . . .

by any person who has suffered injury in fact and has

lost money or property as a result of such unfair

competition.” Cal. Bus. & Prof.Code § 17204 (em-

phasis added)). Because Plaintiffs fail to allege they

actually relied on false or misleading advertise-

ments, they fail to adequately allege causation as

required by Proposition 64. Thus, under §§ 17203

and 17204, Plaintiffs lack standing to bring their

UCL and FAL claims. Plaintiffs’ claims are

dismissed with leave to amend to address these

deficiencies.

3. Plaintiffs’ CLRA Claim

Defendants also seek dismissal! of Plaintiffs’ claim

for damages under the CLRA because they failed to

give proper notice to Defendants of their CLRA claim,

as required by California Civil Code § 1782. Section

1782(a) provides:

* Defendants also argue Plaintiffs improperly “attempt to

pass off as a UCL restitution claim that is effectively a damages

claim for misrepresentation.” (Defendants’ Reply at 7.) “[Plain-

tiffs] argue that Defendants alleged misrepresentations created

an obligation to them to not charge taxes—which is either a

contract or tort theory. of damages for misrepresentation.” (/d.)

(emphasis added). Accordingly, since the UCL only permits

claims for restitution, Defendants contend Plaintiffs’ fail to state

a claim for restitution under the UCL. Restitution, however,

may be based on unjust enrichment. Plaintiffs therefore

sufficiently allege Defendants were unjustly enriched by

improperly shifting sales taxes to consumers. _

30a

Thirty days or more prior to the commencement

of an action for damages pursuant to this title,

the consumer shall do the following:

(1) Notify the person alleged to have employed

or committed methods, acts, or practices de-

clared unlawful by Section 1770 of the particu-

lar alleged violations of Section 1770.

(2) Demand that the person correct, repair,

replace, or otherwise rectify the goods or ser-

vices alleged to be in violation of Section 1770.

The notice shall be in writing and shall be sent

by certified or registered mail, return receipt

requested, to the place where the transaction

occurred or to the person’s principal place of

business within California.

Cal. Civ.Code § 1782(a). Plaintiffs conceded that they

failed to comply with the thirty day notice require-

ment set forth in § 1782, (see Plaintiffs’ Opposition at

21), and through a separate filing have requested

leave of court to “strike the premature allegation of

damages without waiver and without prejudice based

upon inadvertence and excusable neglect of counsel.”

(Id. at 22.) Thus, the only issue presented is whether

the Court should dismiss Plaintiffs’ CLRA damages

claim with or without prejudice:

Defendants argue, based on Von Grabe v. Sprint,

312 F.Supp.2d 1285 (S.D.Cal.2003), that Plaintiffs’

failure to provide adequate notice compels dismissal

of the CLRA claim for damages with prejudice.

Plaintiffs respond, however, by arguing that the facts

in this instance are distinguishable from Von Grabe,

because there has been no attempt to mislead the

court by including the claim for damages, as the

plaintiff did in Von Grabe; rather, the inclusion of

gla

the request for damages was “mistakenly, prema-

turely included [in] the language requesting dam-

ages.” (Plaintiffs’ Opposition at 22.)

In Von Grabe, a cellular phone customer filed

claims arising from an equipment replacement

program fee charged by a cellular carrier. The

plaintiff alleged, among other claims, a claim for

damages under the CLRA. Ruling in the context of a

motion to dismiss, the court dismissed the plaintiffs

CLRA claim with prejudice because he failed to allege

proper notice, as required by § 1782(a). In reaching

its decision, the court relied on the California Court

of Appeal opinion in Outboard Marine Corp. uv.

Superior Court, 52 Cal.App.3d 30, 124 Cal.Rptr. 852

(1975), which held that “strict application of the

[notice] requirement was necessary” to achieve the

goals of the CLRA. The court in Outboard Marine

noted:

The purpose of the notice requirement of section

1782 is to give the manufacturer or vendor

sufficient notice of alleged. defects to permit

appropriate corrections or replacements. The

notice requirement commences the running of

certain time constraints upon the manufacturer

or vendor within which to comply with the

corrective provisions. The clear intent of the act

is to provide and facilitate precomplaint settle-

ments of consumer actions wherever possible and

to establish a limited period during which such

settlement may be accomplished. This clear

purpose may only be accomplished by a literal

‘application of the notice provisions.

Outboard Marine, 52 Cal.App.3d at 40-41, 124

Cal.Rptr. 852 (emphasis added).

32a

Notably, neither Outboard Marine nor Von Grabe

drew a distinction between inadvertence or willful

disregard of the notice requirements. Both courts

held that a claim for damages under the CLRA

requires strict compliance with the notice require-

ments set forth in § 1782. This Court agrees. Strict

adherence to the statute’s notice provision is required

to accomplish the Act’s goals of expeditious reme-

diation before litigation. Because Plaintiffs failed to

provide notice to Defendants pursuant to § 1782(a),

their claim for damages under the CLRA must be

dismissed with prejudice.°

This result is not changed by the fact that

Plaintiffs also brought a claim under the CLRA for

injunctive relief. While § 1782(d) authorizes the

filing of an action for injunctive relief without first

providing notice to the vendor, the statute further —

directs that such an action may not be converted into

an action for damages unless the consumer first

complies with the notice provisions of § 1782(a).

Accordingly, § 1782 scrupulously prohibits any action

for damages unless its notice provisions are met. As

stated, the Legislative goals would be eviscerated if

consumers were allowed to sue for damages without

first providing the statutorily mandated period for

remediation.

Plaintiffs’ claim for damages is therefore dismissed

with prejudice. Plaintiffs’ claim for injunctive relief

stands, pursuant to § 1782(d).

* This ruling, as with all rulings herein, applies only to the

named Plaintiffs.

33a

III.

CONCLUSION AND ORDER

For these reasons, the Court denies Defendants

T-Mobile and Cingular’s motion to compel arbitra- —

tion. In addition, the Court grants without prejudice

Defendants’ collective motion to dismiss Plaintiffs’

claims under the UCL and FAL. Plaintiffs shall file a

second amended complaint within 20 days of the date

this Order is stamped filed addressing the defici-

encies noted herein. Finally, Defendants’ motion to

dismiss Plaintiffs’ claims for damages under the

CLRA is granted with prejudice.

IT IS SO ORDERED.

34a

APPENDIX C

9 U.S.C. § 2. Validity, irrevocability, and enforce-

ment of agreements to arbitrate

A written provision in any maritime transaction

or a contract evidencing a transaction involving

commerce tc 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.

9U.8.C§4. Failure to arbitrate under agree-

ment; -petition to United States

court having jurisdiction for

order to compel arbitration;

notice and service thereof; hear-

ing and determination

A party aggrieved by the alleged failure, neglect, or

refusal of another to arbitrate under a written agree-

ment for arbitration may petition any United States

district court which, save for such agreement, would

have jurisdiction under Title 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. Five days’ notice in

writing of such application shall be served upon the

party in default. Service thereof shall be made in the

manner provided by the Federal Rules of Civil Proce-

dure. The court shall hear the parties, and upon

being satisfied that the making of the agreement for

35a

arbitration or the failure to comply therewith is not

in issue, the court shall make an order directing the

parties to proceed to arbitration in accordance with

the terms of the agreement. The hearing and pro-

ceedings, under such agreement, shall be within the

district in which the petition for an order directing

such arbitration is filed. If the making of the arbitra-

tion agreement or the failure, neglect, or refusal to

perform the same be in issue, the court shall proceed

summarily to the trial thereof. If no jury trial be

demanded by the party alleged to be in default, or if

the matter in dispute is within admiralty jurisdiction,

the court shall hear and determine such ‘issue.

Where such an issue is raised, the party alleged to be

in default may, except in cases of admiralty, on or.

before the return day of the notice of application,

demand a jury trial of such issue, and upon such

demand the court shall make an order referring the

issue or issues to a jury in the manner provided by

the Federal Rules of Civil Procedure, or may specially

call a jury for that purpose. If the jury find that no

agreement in writing for arbitration was made or

that there is no default in proceeding thereunder, the

proceeding shall be dismissed. If the jury find that

an agreement for arbitration was made in writing

and that there is a default in proceeding thereunder,

the court shall make an order summarily directing

the parties to proceed with the arbitration in

accordance with the terms thereof.

553

ating

ii da oa

36a

APPENDIX D

T-Mobile Welcome Guide

* + *K

Section 4: Terms and Conditions

ee, en

3. Mandatory Arbitration: Dispute Resolution. YOU

WILL FIRST NEGOTIATE WITH US IN GOOD

FAITH TO SETTLE ANY CLAIM OR DISPUTE BE-°

TWEEN YOU AND US IN ANY WAY RELATED TO

OR CONCERNING THE AGREEMENT, OR OUR

PROVISION TO YOU OF GOODS, SERVICES, OR

UNITS (“CLAIM”). YOU MUST SEND A WRITTEN

DESCRIPTION OF YOUR CLAIM TO OUR

REGISTERED AGENT (See Sec. 22). IF YOU DO

NOT REACH AGREEMENT WITH US WITHIN 30

DAYS, INSTEAD OF SUING IN COURT, YOU

AGREE THAT ANY CLAIM MUST BE SUBMITTED

TO FINAL, BINDING ARBITRATION WITH THE

AMERICAN ARBITRATION ASSOCIATION (“AAA”)

UNDER ITS PUBLISHED WIRELESS INDUSTRY

ARBITRATION RULES, WHICH ARE A PART OF

THE AGREEMENT BY THIS REFERENCE AND

ARE AVAILABLE BY CALLING THE AAA AT

800-778-7878 OR VISITING ITS WEB SITE AT

www.adr.org. You must serve our registered agent

(See Sec. 22) with a notice of an arbitration in order

to begin an arbitration. This agreement to arbitrate

extends to claims that you assert against other par-

ties, including without limit equipment manufactur-

ers and dealers, if you also assert claims against us

in the same proceeding. The Agreement involves

interstate commerce and despite the choice of law

provision in Sec. 25, the Federal Arbitration Act and

federal arbitration law govern arbitrations under the

Agreement. An arbitrator may only award as much

37a

relief as a court having jurisdiction in the place of

arbitration, limited to the same extent that a court .

would limit such relief and consistent with the

provisions of the Agreement. An arbitrator may

order injunctive or declaratory relief (so long as that

injunctive or declaratory relief does not apply beyond

your dealings with us) or summary judgment under

applicable law. AAA has a fee schedule for arbitra-

tions. You will pay your share of the arbitrator’s fees

except: (a) for claims less than $25, we will pay all

arbitrator’s fees and (b) for claims between $25 and

$1000, you will pay $25 for the arbitrator’s fee. You

and we agree to pay our own other fees, costs and

expenses including those for counsel, experts, and

witnesses. Visit www.adr.org arbitrator fee informa-

tion in hardship circumstances.

Neither you nor we may be a representative of

other potential claimants or a class of potential

claimants in any dispute, nor may two or more in-

dividuals’ disputes be consolidated in one proceeding.

While the prohibition on consolidated or classwide

proceedings in this Sec. 3 will continue to apply: (a)

you may take claims to small claims court, if they

qualify for hearing by such court and (b) if you fail to

timely pay amounts due, we may assign your account

for collection and the collection agency may pursue

sweh claims in court limited strictly to the collection

of the past due debt and any interest or cost of

collection permitted by law or the Agreement. YOU

AND WE ACKNOWLEDGE AND AGREE THAT

THIS SEC. 3 WAIVES ANY RIGHT TO A JURY

TRIAL OR PARTICIPATION AS A PLAINTIFF OR

AS A CLASS MEMBER IN A CLASS ACTION. IF A

COURT OR ARBITRATOR DETERMINES THAT

YOUR WAIVER OF YOUR ABILITY TO PUR-

SUE CLASS OR REPRESENTATIVE CLAIMS IS

38a

UNENFORCEABLE, THE ARBITRATION AGREE-

MENT WILL NOT APPLY AND OUR DISPUTE

WILL BE RESOLVED BY A COURT OF AP.-

PROPRIATE JURISDICTION, OTHER THAN A

SMALL CLAIMS COURT. SHOULD ANY OTHER

PROVISION OF THIS ARBITRATION AGREE-

MENT BE DEEMED UNENFORCEABLE, THAT

PROVISION SHALL BE REMOVED, AND THE

AGREEMENT SHALL OTHERWISE REMAI

BINDING. |

* * *

(5/04)

* Kk K €

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.