SW Legal studies in Business

Arbitration Clause in a Contract of Adhesion Unenforceable Due to Unconscionability
Description

Appeals court held that a mandatory arbitration clause in a cell phone contract was unenforceable due to unconscionability under California law. The contract was one of adhesion, consumers had no bargaining power, and the loss of money is relatively small. The dispute goes to trial, not to arbitration.

Topic Contracts
Key Words

Unconscionable; Enforceable; Adhesion; Arbitration Clause

C A S E   S U M M A R Y
Facts

Shroyer sued Cingular in a class action suit on behalf of similarly affected consumers. He contented that when AT&T merged with Cingular it breached the terms of the cell phone contract, engaged in fraud, and numerous other complaints. The form contract signed by Shroyer contained an arbitration clause requiring all disputes arising out of the agreement to go to arbitration governed by the rules of the American Arbitration Association. The district court dismissed the complaint and ordered the parties to go to arbitration. Shroyer appealed.

Decision

Reversed and remanded. Under California law, a contract provision is unenforceable due to unconscionability only if it is both procedurally and substantively unconscionable, although the two types of unconscionability need not both be present to the same degree. The test used includes several factors: 1) whether the agreement is a consumer contract of adhesion drafted by a party that has superior bargaining power; 2) whether the agreement occurs in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and 3) whether 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. A contract of adhesion is defined as a standardized contract, imposed upon the subscribing party without an opportunity to negotiate the terms. These conditions apply in this instance, so the arbitration clause cannot be enforced, and the dispute may go to trial.

Citation

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

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