## Facts

- T-Mobile provided cellular service to California consumers under standard-form service agreements incorporating separate “Terms and Conditions.”
- The agreements required mandatory arbitration of disputes and barred class or representative proceedings (a class action waiver).
- Consumers challenged T-Mobile’s early termination fee and its sale of “locked” handsets unusable with other carriers.
- The arbitration terms were presented through contract language referencing the Terms and Conditions, a “Welcome Guide,” and packaging notices stating that use constituted agreement.
- In coordinated proceedings, the trial court denied T-Mobile’s motion to compel arbitration, finding the arbitration provision (including the class waiver) unconscionable and unenforceable.
- T-Mobile appealed the order denying arbitration.

## Issues

1. Whether a take-it-or-leave-it consumer service agreement constitutes procedural unconscionability even if alternative providers exist in the market.
2. Whether a class action waiver in a consumer arbitration clause is substantively unconscionable when claims are predictably small and individual pursuit is economically irrational.
3. Whether the Federal Arbitration Act preempts application of California unconscionability doctrine to invalidate a class action waiver in an arbitration agreement.

## Decision

- The Court of Appeal affirmed the order denying T-Mobile’s motion to compel arbitration.
- The service agreement was a contract of adhesion establishing at least a minimal degree of procedural unconscionability, notwithstanding market alternatives.
- The class action waiver created a high degree of substantive unconscionability because it effectively insulated T-Mobile from liability for widespread low-value harms.
- Considering California’s sliding-scale approach, the combination of minimal procedural unconscionability and high substantive unconscionability rendered the arbitration provision unenforceable.
- The court declined to sever the class waiver and enforce individual arbitration.
- In an unpublished portion, the court rejected T-Mobile’s argument that the FAA preempted invalidation of the class waiver under generally applicable unconscionability principles.

## Legal Principles

- A consumer contract of adhesion generally establishes a minimal level of procedural unconscionability absent unusual circumstances, even where market alternatives exist.
- Class action waivers in adhesive consumer arbitration agreements may be substantively unconscionable when they operate in practice to exculpate a business from liability for predictably small individual damages arising from alleged widespread misconduct.
- California unconscionability requires both procedural and substantive elements, evaluated on a sliding scale; a strong showing of substantive unconscionability can offset a lesser showing of procedural unconscionability.
- When an arbitration provision’s unfair terms permeate the agreement, a court may refuse to enforce the arbitration clause rather than sever the offending term.

## Conclusion

The court held that T-Mobile’s adhesive arbitration agreement, which barred class proceedings, was unenforceable because the class waiver was highly substantively unconscionable in small-value consumer disputes and, combined with at least minimal procedural unconscionability, justified denying arbitration.


Gatton v. T-Mobile USA, Inc., 152 Cal. App. 4th 571 (Cal. Ct. App. 2007)