## Facts

- Following the 2004 merger of Cingular and AT&T Wireless, Kennith Shroyer, an AT&T customer, alleged his wireless service substantially worsened.
- Shroyer alleged defendants used misrepresentations to push former AT&T customers to migrate to Cingular plans and equipment and to accept extended commitments, while warning that early termination fees could apply if they later left.
- Cingular’s standard terms and conditions were a take-it-or-leave-it consumer agreement containing a mandatory arbitration clause.
- The arbitration provision included a class arbitration waiver barring customers from pursuing claims on a class basis in arbitration or any other forum.
- Shroyer filed a putative California class action asserting statutory consumer-protection claims and common-law and contract claims, alleging a practice that extracted individually small amounts from many consumers.

## Issues

1. Whether the class arbitration waiver in Cingular’s consumer service contract was unenforceable as procedurally and substantively unconscionable under California law (including the rule associated with *Discover Bank*).
2. Whether the Federal Arbitration Act preempted California’s use of unconscionability doctrine to invalidate the class arbitration waiver.

## Decision

- The Ninth Circuit reversed the district court’s order compelling arbitration.
- The court held the class arbitration waiver was unconscionable and unenforceable under California law.
- The court held the FAA did not preempt California’s generally applicable unconscionability doctrine as applied to invalidate the waiver.
- The case was remanded for further proceedings consistent with the invalidation of the class waiver.

## Legal Principles

- Under California law, unconscionability requires both procedural and substantive unconscionability, evaluated on a sliding scale.
- Procedural unconscionability is supported where an arbitration clause appears in a consumer contract of adhesion imposed by a party with superior bargaining power and lacking meaningful negotiation.
- A class action or class arbitration waiver in a consumer adhesion contract is substantively unconscionable where (1) the disputes predictably involve small individual damages and (2) the plaintiff alleges deliberate misconduct affecting many consumers, because the waiver can operate as an exculpatory term by making individual enforcement economically irrational.
- The FAA permits invalidation of arbitration provisions on generally applicable contract defenses (including unconscionability) and does not preempt state rules that apply evenhandedly and do not single out arbitration for disfavored treatment.

## Conclusion

The Ninth Circuit concluded that Cingular’s class arbitration waiver, imposed through a consumer adhesion contract and alleged to shield widespread small-value misconduct from effective challenge, was unconscionable under California law and could be invalidated without FAA preemption, requiring reversal of the order compelling arbitration.


Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d 976 (9th Cir. 2007)