Chalk v. T-MOBILE USA, INC.
47 Communications Reg. (P&F) 738, 2009 U.S. App. LEXIS 7878, 560 F.3d 1087 (2009)
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Rule of Law:
Under Oregon law, a class action waiver in a consumer contract of adhesion is substantively unconscionable, and therefore unenforceable, if individual claims are predictably small, as the waiver effectively prevents consumers from vindicating their rights.
Facts:
- Paul Stewart and Ellen Chalk purchased a wireless PC card from T-Mobile USA, Inc. and signed a one-year service agreement.
- The agreement, presented on a take-it-or-leave-it basis, included terms requiring mandatory arbitration of disputes and waiving the right to participate in class actions.
- A label on the sealed box containing the card and a Welcome Guide also referenced these terms, including the mandatory arbitration provision.
- The PC card worked for approximately three weeks and then became physically incompatible, as it could no longer be inserted into the plaintiffs' IBM ThinkPad laptop.
- T-Mobile provided three refurbished replacement cards, but none of them could be inserted into the laptop either.
- A Sony representative at the T-Mobile store also failed to insert the card and promised to contact the plaintiffs with a solution but never did.
Procedural Posture:
- Plaintiffs Paul Stewart and Ellen Chalk filed a class action lawsuit against T-Mobile and Sony in federal district court.
- Defendants filed a motion to dismiss the case or stay proceedings and compel arbitration pursuant to the service agreement.
- The district court granted the defendants' motion and dismissed the case, compelling arbitration.
- In its ruling, the district court severed a provision regarding attorney's fees as unconscionable but upheld the class action waiver.
- Plaintiffs (as Appellants) filed a timely notice of appeal to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Under Oregon law, is a class action waiver provision within a mandatory arbitration clause of a consumer service agreement substantively unconscionable and thus unenforceable?
Opinions:
Majority - Reinhardt, Circuit Judge
Yes, a class action waiver provision within a mandatory arbitration clause of a consumer service agreement is substantively unconscionable and thus unenforceable under Oregon law. The court held that while the T-Mobile agreement was not procedurally unconscionable, its class action waiver was substantively unconscionable. Citing the Oregon appellate case Vasquez-Lopez, the court reasoned that such waivers are substantively unconscionable for two primary reasons: 1) they are inherently one-sided in effect, as companies are highly unlikely to ever bring a class action against their customers, and 2) they effectively prevent consumers from vindicating their rights for small-value claims, as the cost and effort of individual arbitration would outweigh any potential recovery. Because the agreement contained a non-severability clause stating that the entire arbitration agreement is void if the class action waiver is found unenforceable, the court held that the entire arbitration agreement was unenforceable, allowing the plaintiffs' class action to proceed in court.
Analysis:
This decision reinforces the application of state-law unconscionability doctrine as a defense to the enforcement of arbitration agreements under the Federal Arbitration Act (FAA). It establishes for the Ninth Circuit, applying Oregon law, that substantive unconscionability alone can be sufficient to invalidate a key contract term, especially in an adhesion contract with unequal bargaining power. The ruling aligns with a trend in other states (like California and Washington) that view class action waivers in consumer contracts for small-stakes disputes as contrary to public policy because they effectively immunize companies from liability for widespread but low-damage misconduct. This case highlights how specific contract language, such as a non-severability clause, can have determinative effects, causing an entire arbitration agreement to fail when one part is struck down.
