TechLaw

It is really tough to get a class arbitration waiver upheld in California. Maybe impossible. When the Ninth Circuit, in Shroyer v. New Cingular Wireless Services Inc., 498 F.3d 976 (9th Cir. 2007), held that the class arbitration waiver in Cingular (now AT&T)'s wireless terms of service was unconscionable, the company decided to "improve" the class arbitration waiver language rather than eliminate it.

AT&T added to the AT&T Mobility terms of service several incentives for plaintiffs to engage in individual arbitration. Chief among them:

If a person prevails on the merits at arbitration, and receives an award: (1) equal to or less than the greater of (a) $5,000 or (b) the maximum jurisdictional dollar amount for small claims actions in the county containing the person’s billing address; and (2) greater than AT&T’s last written offer prior to selecting an arbitrator; then AT&T will pay the greater of (1) or (2) instead of the award, and pay the person’s attorney double their fees and reimburse them for reasonable costs.

This isn't good enough, according to the court's decision in Steiner v. Apple Computer Inc., No. 07-4486 (N.D. Cal., March 12, 2008). The plaintiff sought class treatment of his claim that Apple unlawfully failed to disclose substantial expenses iPhone users would incur when replacing batteries on the device. The court ruled that, after Shroyer, AT&T needed to demonstrate that the individual arbitration remedy available under the terms of service "functions as well as a class action would, such that it has not insulated itself from hundreds of thousands, if not millions of iPhone users seeking recovery of the hidden $114.95 in annual battery-changing and related charges."

The court held that the benefits of pursuing individual arbitration were illusory in many instances; in any event, it said, the relevant inquiry is a comparison between the outcomes for all iPhone consumers under the arbitration agreement and under a class action suit. "In this regard, AT&T has not presented any evidence that all iPhone consumers would recover more, on average, if the Court let the Arbitration Agreement stand rather than allowing the Steiners' class action to proceed."

The court was not concerned with whether the plaintiff would receive a fair hearing on his claim. Rather, the inquiry was whether all iPhone users would do better in a class action. On the subject of attorneys' fees, the court wrote that reasonable attorneys' fees in arbitration were not be an adequate incentive to seek redress because what attracts attorneys to class actions is the prospect of lucrative attorneys' fees.

It is hard to imagine any class arbitration waiver that could withstand this sort of inquiry. The main purpose of an arbitration clause is to minimize exposure to litigation. After Shroyer, it appears, the fact a consumer will be able to receive a fair hearing in an individual arbitration proceeding does not save a class arbitration waiver from a finding of unconscionability. In cases like Shroyer and now Steiner, where the plaintiff alleges that the defendant has engaged in a fraudulent scheme by taking a little money from thousands or millions of consumers, any attempt to minimize liability via arbitration will be suspect.

A proposed class action lawsuit against Yahoo!/Overture Services Inc. picked up momentum April 21, when a federal trial court in California turned back a handful of grounds for summary dismissal of claims that Yahoo! misrepresented the quality of the online venues on which it would display the plaintiffs' advertisements. The plaintiffs alleged that Yahoo! promised to display advertisements on Web sites targeted to likely customers; instead, the lawsuit claimed, Yahoo! placed the plaintiffs' advertisements in low-quality locations: inside spyware programs, on typosquatting Web sites, and on domain parking and bulk registration sites.

Among Yahoo!'s arguments for dismissal was its contention that California's unconscionability doctrine does not apply to commercial contracts. There is some support for this argument. Nearly all cases describe the state's unconscionability doctrine using the term "consumer," and many characterize the unconscionability doctrine's rationale as one of rectifying the imbalance of bargaining power between consumers and businesses. For example, a leading case, Discover Bank v. Super. Ct., 36 Cal.4th 148 (2005), summarized the fact pattern there as one in which the defendants "carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money." Language like this limits the unconscionability doctrine to consumer cases, Yahoo! argued.

Here, the court rejected the view that commercial contracts are categorically outside the protection of the unconscionability doctrine:

[A]lthough Discover Bank's holding addresses only consumer contracts, nothing in that decision forecloses the possibility that a class action waiver in a commercial contract may be deemed unconscionable under certain circumstances. Defendants point to no authority to support the contention that class action waivers in commercial contracts should be treated differently than such waivers in consumer contracts, and the Court has identified ems.bna.com. Accordingly, there appears to be no basis for concluding that class action waivers in the commercial context cannot be found to be unconscionable and unenforceable.

The court permitted the case to go forward, allowing the plaintiffs to build a factual foundation for their unconscionability claim. Did Yahoo! have superior bargaining power over the plaintiffs? Could the plaintiffs have feasibly chosen other advertising services? Would it be practical for the plaintiffs to pursue individual remedies instead of a class suit?

Taking up another issue, the court ruled that the plaintiffs would be permitted to conduct discovery for extrinsic evidence indicating that -- notwithstanding the parties' written contract -- the defendants promised in their marketing materials that the plaintiffs would receive "highly targeted" advertising services.

The case is In re Yahoo! Litigation, No. CV 06-2737 (C.D. Cal., April 21, 2008).