Cingular Wireless can't compel customers to sign away their right to file class-action lawsuits against the company, a federal appeals court ruled Friday.
Calling the clause in Cingular's contract "unconscionable," the U.S. 9th Circuit Court of Appeals in San Francisco paved the way for a consumer class-action suit to go to trial in Los Angeles.
That's important because disputes with cellphone providers don't usually involve the kind of big bucks that would tempt lawyers to take up customers' cases. By banding together, aggrieved consumers have a better hope of getting wireless providers to change disputed practices.
The ruling's effect also could stretch far beyond Cingular, now owned by San Antonio-based AT&T Inc. and renamed AT&T. Virtually all of the nation's major credit card firms and phone companies include similar clauses in their contracts, as do car dealers and many retailers.
The 3-0 decision could affect at least 10 other cases in which customers sued Cingular only to have company attorneys argue that their cellphone contracts bound them to settle disputes through arbitration. Federal court judges in several parts of California have rejected Cingular's position in all of those lawsuits, and legal experts said they thought Friday's ruling would affect the outcome of any appeals the company lodged in those cases.
Paul Bland, an attorney with Trial Lawyers for Public Justice in Washington, said the ruling was significant because companies had launched "relentless attacks" when courts have ruled in favor of consumers on this issue.
"It is one of those battles where it feels like it never stays won," said Bland, who has argued similar cases around the country. "This is a carefully thought-out, scholarly opinion that will hopefully put to rest a lot of the efforts to re-litigate this issue."
Friday's ruling stemmed from a suit filed by Kenneth Shroyer of Los Angeles. Shroyer, who had been an AT&T Wireless customer, alleged that the quality of his service deteriorated after the company was acquired by Cingular in 2004. He said that when he called to complain he was told that he could get better service if he switched to a Cingular system, which involved getting a new chip in his phone.
To get the chip, Shroyer's suit alleges, he had to sign a contract that said if he had a dispute with the company, he would have to settle it on his own and could not join other consumers in a lawsuit.
Shroyer filed a class-action suit in California state court, alleging that Cingular and AT&T had engaged in unfair competition, untrue and misleading advertising, violations of state consumer laws, fraud and deceit, and unjust enrichment.
The company removed the case to federal court, contending that it was governed by the Federal Arbitration Act, and asked a federal judge to compel Shroyer into arbitration.
The appeals court found that U.S. District Judge Manuel Real in Los Angeles had incorrectly interpreted precedent in the case and had adopted a proposed order by the phone company "without making any changes to it."
Both Shroyer and Cingular agreed before the 9th Circuit that California law should be applied to determine whether the company's arbitration-class-action waiver was "unconscionable."
California courts have determined that a contract term is unconscionable if three conditions are met: The consumer contract was drafted by a party with "superior bargaining power"; the dispute involves small amounts of damages; and the party with the superior bargaining power is accused of trying to deliberately cheat large numbers of customers out of small amounts of money.
The 9th Circuit said this case met the first two tests because, at most, Shroyer and other class members suffered individual damages in the hundreds of dollars. The court said the case met the third qualification because Shroyer had alleged that Cingular deliberately and falsely told thousands of AT&T customers that their service would be improved only if they entered into contract extensions with Cingular.
The appeals court ruling, written by Judge Stephen Reinhardt, also concluded that the suit was not barred by the Federal Arbitration Act.
Shroyer's attorneys, William Weinstein of New York and Michael Kelly of El Segundo, said they were pleased with the ruling, which could affect thousands of Cingular customers. Kelly said many companies had changed the language of their arbitration agreements in recent years in an attempt to have them pass muster under a 2005 decision by the California Supreme Court.
He said this was the first time the 9th Circuit had ruled on one of the new "so-called friendly clauses."
AT&T spokesman Walt Sharp said that the ruling was based on the company's old arbitration clause, and that it had been improved to become "more consumer-friendly."
"We believe arbitration is the best course of resolution for our customers," he said.
Sharp said the company was still reviewing its options, which include asking the 9th Circuit to rehear the case with a larger panel of judges or asking the U.S. Supreme Court to review the case.