Summary: This is a civil action by Plaintiff on behalf of himself and all other people in the State of California who purchased a 16 gigabyte Samsung Galaxy S4 mobile telephone during the period beginning one year before the filing of his complaint until the time of class certification. Defendants advertised, promoted and marketed their Galaxy S4 mobile telephone as having 16 gigabytes (“16 GB”) of storage capacity. However, because the pre-installed internal operating software consumes nearly half of the full storage capacity, approximately 50% of the represented 16 GB storage capacity is inaccessible and unusable by consumers.
|UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA|
|CONRAD N. SHEFFER, an individual, on behalf of himself and all others similarly situated,
SAMSUNG TELECOMMUNICATIONS AMERICA, LLC, a New York corporation; SAMSUNG ELECTRONICS AMERICA, a New Jersey Corporation; and DOES 1-100, inclusive;
|CASE NO.: CV-13-03466-GW(AJWx)
PLAINTIFF’S RESPONSE TO DEFENDANTS’ MOTION TO COMPEL ARBITRATION; MEMORANDUM OF POINTS AND AUTHORITIES
Date: September 12, 2013
Time: 8:30 a.m.
Courtroom: 10—Los Angeles
Judge: Hon. George H. Wu
Plaintiff Conrad N. Sheffer (“Plaintiff”) files this Response to Defendants’ Motion to Compel Arbitration and Memorandum of Points and Authorities and would show the Court as follows:
This is a civil action by Plaintiff on behalf of himself and all other people in the State of California who purchased a 16 gigabyte Samsung Galaxy S4 mobile telephone during the period beginning one year before the filing of his complaint until the time of class certification. Defendants advertised, promoted and marketed their Galaxy S4 mobile telephone as having 16 gigabytes (“16 GB”) of storage capacity. However, because the pre-installed internal operating software consumes nearly half of the full storage capacity, approximately 50% of the represented 16 GB storage capacity is inaccessible and unusable by consumers. Plaintiff seeks restitution from Defendants for violations of the False Advertising Law and the Unfair Competition Law relating to Defendants’ misrepresentations and material omissions alleged in the Complaint. Plaintiff also seeks injunctive relief under the California Consumer Legal Remedies Act.
Defendants have filed a Motion seeking to compel arbitration of this dispute. The Motion is based on arbitration provisions found in the Samsung User Manual and the ATT Wireless Customer Agreement governing Plaintiff’s cellular service with ATT. As set forth more fully below, Defendants’ Motion should be denied. Plaintiff did not assent to the arbitration provision in the Samsung User Manual, which was provided to him only after he purchased his phone. Moreover, the arbitration provision is unenforceable under California law because it is both procedurally and substantively unconscionable. Additionally, Plaintiff’s claims for pre-sale misrepresentations and omissions do not fall within the scope of the release in the Samsung User Manual. As for the ATT arbitration provision, it is unenforceable by Defendants, non-signatories to the agreement. Defendants’ Motion should therefore be denied.
On March 14, 2013, Samsung Mobile Communications chief JK Shin announced the release of an improved version of the Galaxy smart phone called the “Galaxy S4.” The Galaxy S4 first became available for purchase on or about April 27, 2013. Defendants represented the Galaxy S4 as having 16 gigabytes (16 GB) of storage space. The 16 GB Galaxy S4 retails for approximately $649.99 or $249.99 plus rebate if the purchaser buys the phone through a wireless service provider and signs or renews a wireless service contract. Dkt-15 at ¶15.
On May 1, 2013, Plaintiff purchased a 16GB Galaxy S4. Plaintiff’s purchase of the Galaxy S4 was made in reliance on Samsung Telecommunications and SEA’s misrepresentations and omissions regarding the usable storage space. Dkt-15 at ¶19. Specifically, Plaintiff visited Defendants’ website approximately two weeks before his purchase of the Galaxy S4. The website advertised that the Galaxy S4 possessed 16 GB of storage space. Id. Similarly, the reverse side of the box in which the phone is packaged misrepresents the Galaxy S4 as having “16GB” of storage space without any disclosure that nearly half of that capacity is unavailable to the consumer. Dkt-15 at ¶20. Defendants knew, but concealed and failed to disclose on their internet website and product packaging that:
a. 16 GB are not actually available to consumers to store data, files, apps, photographs and other media on the Galaxy S4;
b. the Galaxy S4 operating system consumes approximately 6.85 GB of the represented storage capacity of the Galaxy S4;
c. for a consumer who purchases the 16 GB Galaxy S4, as Plaintiff did, approximately 50% of the represented storage capacity is inaccessible and unusable;
d. the amount of internal memory taken up by the Galaxy S4’s operating system is much higher than comparable smart phones, both in terms of the total amount of memory utilized (approximately 6.85 GB) and the percentage of the total memory utilized (approximately 43%); and
e. the problems associated with the lack of available free memory are compounded by the fact that apps and most media files cannnot be stored on micro SD cards available from third party vendors.
Dkt-15 at ¶¶17-21.
In response to public criticism over the limited storage, a representative of Defendants issued a statement that a micro SD card is available that provides for the expansion of memory up to 64GB. Dkt-15 at ¶18. However, a micro SD card is only available for purchase. Such micro SD cards are often unreliable. Moreover, there are significant limitations on what users of the Galaxy S4 can place on the card that fail to address the problems of internal storage with the Galaxy S4. Id. Specifically, certain programs such as mobile apps, Google Play movies and TV shows and Google Music are restricted to internal memory and cannot be stored on a micro SD card. Id. Samsung Telecommunications and SEA failed to disclose that apps and most media files could not be stored on the micro SD cards available from third-party vendors. Id.
After purchasing his Galaxy S4, Plaintiff loaded music, games, photographs, videos and mobile applications onto the phone. Plaintiff ultimately learned, however, that the Galaxy S4 had substantially less storage capacity to accommodate downloaded materials than he initially believed. Dkt-15 at ¶23. Plaintiff thereafter filed this class action seeking redress for Defendants’ unfair business practices, false, deceptive and misleading advertising, and violations of the Consumers Legal Remedies Act (“CLRA”).
ARGUMENT AND AUTHORITIES
I. California law applies to the Samsung arbitration provision.
Defendants contend that the Samsung arbitration provision should be interpreted under Texas law due to a choice of law provision found in the Samsung User Manual. However, under applicable choice of law principles, California law applies to the Samsung arbitration provision. In undertaking a choice of law analysis, federal courts apply the choice of law rules of the state in which they are located. Ticknor v. Choice Hotels Intern., Inc., 265 F.3d 931, 937 (9th Cir. 2001). Under California choice of law rules, courts apply a three-part test:
a court must first determine as a threshold matter whether the chosen state has a substantial relationship to the parties or their transaction or whether there is any other reasonable basis for the parties’ choice of law. If either of these tests is satisfied, then second inquiry is whether the chosen state’s law is contrary to a fundamental policy of California. If such a conflict with California law is found, the court must then determine whether California has a materially greater interest than the chosen state in the determination of the particular issue.
Hoffman v. Citibank, 546 F.3d 1078, 1082 (9th Cir. 2008). Because Texas is the home state of Defendant Samsung Telecommunications, Plaintiff concedes that there is a reasonable basis for a Texas choice of law provision. However, as set forth below, Texas law is not applicable because its law is contrary to a fundamental policy of California and California has a materially greater interest in determining the enforceability of the instant arbitration provision against a California resident who purchased a product in California after relying on representations made in California.
A. Texas law regarding the enforceability of arbitration provisions is contrary to a fundamental policy of California.
Texas law regarding the enforceability of arbitration provisions is contrary to a fundamental policy of California. Under both California and Texas law, an arbitration provision that is unconscionable is unenforceable. However, under Texas law, “arbitration agreements are not inherently procedurally unconscionable even if they might be considered contracts of adhesion.” Johnson v. AT&T Mobility, LLC, Case No. 09-CV-4104, 2010, 2010 U.S. Dist. LEXIS 134850 at *11 (S.D. Tex. Dec. 21, 2010). By contrast, California law holds that contracts of adhesion are “procedurally unconscionable at least to some degree.” Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1004 (9th Cir. 2010). Moreover, Texas courts apply a “stringent standard” under which arbitration provisions are enforceable unless “some form of oppression and unfairness” has “taint[ed] the negotiation process leading to the agreement’s formation.” Johnson, 2010 U.S. Dist. LEXIS 134850 at *11. As a result of this stringent standard, “the only cases under Texas law in which an agreement was found procedurally unconscionable involve situations in which one of the parties appears to have been incapable of understanding the agreement.” Fleetwood Enters. v. Gaskamp, 280 F.3d 1069, 1077 (5th Cir. 2002); see also Bridge Fund, 622 F.3d at 1004 (noting that while “Texas does recognize unconscionability as a contract defense . . . such a defense rarely succeeds in that state”).
California has a fundamental policy against enforcing unconscionable arbitration and class action waiver provisions, especially against California citizens. See Hoffman v. Citibank, 546 F.3d 1078, 1082 (9th Cir. 2008). Because the adhesive arbitration provision at issue here is unconscionable under California law, Texas law, which would arguably permit enforcement of the provision, is contrary to a fundamental policy of California. See Del Rio v. CreditAnswers, LLC, Case No. 10cv346-WQH-BLM, 2010 U.S. Dist. LEXIS 52118 at *10 (S.D. Cal. May 27, 2010) (“Under California law, if a contractual provision is found to be unconscionable, it is unenforceable. If a contractual provision, such as the class action waiver in the Agreement, is unenforceable, California’s fundamental policy is implicated.”); Oestreicher v. Alienware Corp., 502 F. Supp. 2d 1061, 1067 (N.D. Cal. 2007) (“[If] the class action waiver would be unenforceable under California law, . . . California’s fundamental policy is implicated.”); Hoffman, 546 F.3d at 1082 (“if Citibank’s class arbitration waiver is unconscionable under California law, enforcement of the waiver under South Dakota law would be contrary to a fundamental policy of California.”).
B. California has a materially greater interest in the determination of the enforceability of the instant arbitration provision.
California has a materially greater interest in the determination of the enforceability of the instant arbitration provision than does Texas. Although one of the two Defendants has its principal place of business in Texas, it is a New York corporation. Dkt-15 at ¶6. By contrast, this case has numerous connections to California:
- Plaintiff is a citizen of California;
- Plaintiff has brought a class action complaint on behalf of a California class;
- Plaintiff has asserted claims under the California Consumers Legal Remedies Act and the California Business & Professions Code;
- Plaintiff relied on Defendants’ misrepresentations in California;
- Plaintiff purchased his Galaxy S4 phone in California; and
- To the extent the Samsung User Manual is a contract, it was entered into in California, where Plaintiff resides and purchased his phone.
Under these circumstances, California has a materially greater interest in the enforceability of the Samsung arbitration provision than does Texas. See Del Rio, 2010 U.S. Dist. LEXIS 52118 at *23 (“California has a strong interest in this litigation: the putative classes consist only of California residents, and the Complaint alleges claims brought pursuant to the California Consumer Legal Remedies Act and the California Business and Professions Code.”); Oestreicher, 502 F. Supp. 2d at 1069 (“The fact that the putative class members are California residents and [defendant] is a Florida company favors California, as the governmental interest is stronger in protecting the party with inferior bargaining power. An additional factor favoring California is the fact that [plaintiff] has brought causes of action pursuant to California consumer protection statutes.”); Bridge Fund, 622 F.3d at 1004 (“Because the relevant franchises in this case were operated in California, by California citizens, California would suffer a significant impairment of its public policy if this arbitration clause were enforced against its citizens.”); Ulbrich v. Overstock.com, Inc., 887 F.Supp.2d 924, 931 (N.D. Cal. 2012) (court found that differences between California and Utah law “reflect a strong California policy in favor of protecting its citizens from enforcement of agreements that do not comport with California unconscionability standards” and concluded that “California has a materially greater interest than Utah in the determination of whether a California citizen should be required to submit his employment-related claims to arbitration.”). As such, California law, not Texas law, should be applied to the arbitration provision. Id. at 931 (applying California law to arbitration provision despite contractual choice of Utah law because California had a materially greater interest than Utah given plaintiff was a California citizen); Del Rio, 2010 U.S. Dist. LEXIS 52118 at *24 (applying California law to arbitration provision despite contractual choice of Texas law because California had a materially greater interest than Texas given that case was brought on behalf of California class under California consumer protection statutes); Bridge Fund, 622 F.3d at 1004 (applying California law to arbitration provision despite contractual choice of Texas law because California had a materially greater interest than Texas given that plaintiffs were California citizens); Oestreicher, 502 F. Supp. 2d at 1069 (applying California law to arbitration provision despite contractual choice of Florida law because California had a materially greater interest than Florida since case was brought on behalf of California class under California consumer protection statutes).
II. The Samsung arbitration provision is unenforceable because Plaintiff never assented to its terms.
The Samsung arbitration provision is unenforceable because Plaintiff never assented to its terms. Under California law, manifestation of assent is a required element of a binding arbitration agreement (or any other contract). Windsor Mill, Inc. v. Collins & Aikman Corp., 101 Cal. Rptr. 347, 351 (Cal. Ct. App. 1972) (the “principle of knowing consent applies with particular force to provisions for arbitration.”). Here, Plaintiff did not receive the Samsung User Manual until after he had completed his purchased:
At the time I purchased my Galaxy S4 phone, I had not received or reviewed a copy of the Samsung User Manual. The manual was packaged inside the box the phone came in. I could not review the Samsung User Manual until after I had purchased my Galaxy S4 phone.
Exhibit 1 at ¶5. Nor had he seen the Samsung User Manual on Samsung’s website:
It is my understanding that Samsung has alleged that I could have learned of the arbitration provision in the Samsung User Manual by clicking on a certain link on their website – http://www.samsung.com/us/mobile/cell-phones/SGH-I337ZWAATT — which I had visited before I bought my phone. However, the link I believe they are referring to is titled “Download Product Manual.” The link gives no indication that the manual contains an arbitration provision. Also, the link does not appear on the first screen after opening the website. In fact, you have to scroll down to the third screen before the link appears. The link appears on a page entitled “Key Specs.” Also the link is in very small type, much smaller than the other type on the website. I never clicked on this link when I viewed the website before purchasing my phone.
Exhibit 1 at ¶6.
Even after Plaintiff received and reviewed the Samsung User’s Manual, he was not aware of the arbitration provision. As he has explained:
After I purchased my Galaxy S4 phone and returned home, I removed the Samsung User Manual from the box. I then reviewed the Samsung User Manual for information about how to use the phone. In doing so, I never saw the arbitration provision I understand Samsung is using to try to force me to arbitrate my dispute.
The arbitration provision is found in a single sentence on page 245 of a 263 page document. It is on the fourth page of a section of the Samsung User Manual entitled “Section 12: Warranty Information.” heading of the section is “Standard Limited Warranty.” The arbitration provision is found immediately after a sub-heading entitled “What is the procedure for resolving disputes?” The arbitration provision is in all caps, but is not in bold as are many of the headings in the Samsung User Manual. The paragraph containing a class action waiver is not in all caps or bold. Nothing in the Samsung User Manual alerted me to the fact that it contained an arbitration provision or class action waiver.
Exhibit 1 at ¶¶7-8.
Under California law, “an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he is unaware, contained in a document whose contractual nature is not obvious.” Specht v. Netscape Comms., 306 F.3d 17, 30 (2d Cir. 2002) (Sotomayor, J.) (applying California law). When “a writing does not appear to be a contract and the terms are not called to the attention of the recipient . . . no contract is formed with respect to the undisclosed term.” Id. Here, the arbitration provision at issue was far from conspicuous. In fact, it was hidden on page 245 of a document entitled “User Manual” under a heading titled “Warranty Information” and a sub-heading titled “Standard Limited Warranty.” Exhibit 1 at ¶8. Plaintiff, unaware of its existence, could not have assented to its terms, and the provision is therefore unenforceable:
Lima did not know about the Terms Agreement prior to his purchase. Gateway did not inform Lima about this agreement over the phone. Although Lima visited the Gateway website, which contained a link to the Terms Agreement, there is no evidence that he saw it there. . . .
Lima did not have notice of the Terms Agreement—actual or constructive—until after the purchase when his receipt arrived in the mail. As a result, the Terms Agreement became a proposal for additional terms. Because Lima never manifested his assent to these additional terms, the arbitration clause in particular, they are not a part of his purchase agreement with Gateway.
Lima v. Gateway, Inc., 886 F.Supp.2d 1170, 1179-80 (N.D. Cal. 2012).
Defendants claim that Plaintiff’s assent to the arbitration provision may be implied by his failure to “opt out” of the provision by following the instructions in the Samsung User’s Manual.
However, Plaintiff was not even aware of the existence of the opt-out provision, which was found on page 246 of the Samsung User Manual in a section entitled “Warranty Information” and under a subheading entitled “Standard Limited Warranty.” See Exhibit 1 at ¶8; Dkt 11-1 at 246. Even if Plaintiff had been aware of this opt-out provision, however, his mere failure to act could not be interpreted as assent to the terms of the arbitration provision:
It is also of no moment that the Terms Agreement purports to apply to Lima’s purchase unless, within 15 days of receiving it, he notifies Gateway in writing that he does not agree to it and returns his monitor under Gateway’s return policy. Ordinarily mere silence or inaction in the face of the offer of a contract cannot amount to an acceptance. Silence or inactivity will constitute assent only where circumstances or the previous course of dealing between the parties places the offeree under a duty to act or be bound. Here, the parties had no previous interactions and Lima had no duty to respond.
Id. at 180 (emphasis added); see also Legal Additions, LLC v. Kowalski, No. C-08-2754 EMC, 2010 U.S. Dist. LEXIS 80663 at *3 (N.D. Cal. July 2, 2010) (“Silence in the face of an offer is not an acceptance unless there is a relationship between the parties or a previous course of dealing pursuant to which silence would be understood as an acceptance.”).
Finally, although Defendants’ Motion repeatedly emphasizes such a policy, “the federal policy favoring arbitration is inapplicable to the determination of whether a valid agreement to arbitrate between the parties exists.” Campos v. Campos Family Farms, LLC, 1:12-cv-00598-LJO-GSA, 2012 U.S. Dist. LEXIS 79941 at *21 (E.D. Cal. June 8, 2012). Rather, that determination is made by reference to the ordinary state law contract principles discussed above. See, e.g., Beard v. Santander Consumer USA, Inc., Case No. 1:11-cv-11-1815-LJO-BAM, 2012 U.S. Dist. LEXIS 53882 at *11 (E.D. Cal. April 16, 2012). As set forth above, application of those principles demonstrates that Plaintiff did not assent to the arbitration provision in the Samsung User Manual and that Defendants have failed to meet their burden of proof on the existence of an agreement to arbitrate. See, e.g., Aoki v. Gilbert, Case No. 2:11-cv-02797-MCE-CKD, 2013 U.S. Dist. LEXIS 38235 at *16 (March 19, 2013) (“Because the existence of an arbitration agreement is a statutory prerequisite to granting a petition to compel arbitration, the party seeking to enforce the agreement bears the burden of proving the agreement exists by a preponderance of the evidence.”).
III. The Samsung arbitration provision is unenforceable because it is unconscionable.
The Samsung arbitration provision is also unenforceable because it is unconscionable. Under California law:
unconscionability has both a “procedural” and a “substantive” element, the former focusing on “oppression” or “surprise” due to unequal bargaining power, the latter on “overly harsh” or “one-sided” results. The prevailing view is that [procedural and substantive unconscionability] must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. But they need not be present in the same degree. Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves.
Armendariz v. Foundation Health Psychcare Servs., Inc., 99 Cal. Rptr. 2d 745 (Cal. 2000).
These same legal principles continue to apply even after the U.S. Supreme Court’s decision in Concepcion. See Zaborowski v. MHN Gov’t Servs., No. C 12-05109-SI, 2013 U.S. Dist. LEXIS 62484 at *6 (N.D. Cal. May 1, 2013) (“Concepcion explicitly left unconscionability available as a defense to arbitration agreements.”); Collins v. Taco Bell Corp., No. SACV-13-0458-DOC(JPRx), 2013 U.S. Dist. LEXIS 108951 at *10 (C.D. Cal. July 31, 2013) (“Taco Bell argues that AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746, 179 L. Ed. 2d 742 (2011) abrogates the principles of unconscionability applied by the California Supreme Court in Armendariz. This Court has previously rejected that argument, and Taco Bell’s citations to the contrary are wholly unconvincing.”); AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746, 1750 n.6 (2011) (“Agreements to arbitrate [may] be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability . . . States remain free to take steps addressing the concerns that attend contracts of adhesion”). As set forth below, the arbitration provision at issue herein is unconscionable and is therefore unenforceable.
B. The Samsung arbitration provision is procedurally unconscionable.
1. The Samsung arbitration provision is procedurally unconscionable because it is a contract of adhesion that was procured by a party with unequal bargaining power.
The Samsung arbitration provision is procedurally unconscionable because it is a contract of adhesion that was procured by a party with unequal bargaining power. The Samsung User Manual containing the arbitration provision was a pre-printed, 263-page document which Plaintiff had no power to negotiate. Exhibit 1 at ¶¶8-9. The document was essentially a take-it-or-leave-it proposition. “California law treats contracts of adhesion, or at least terms over which a party of lesser bargaining power had no opportunity to negotiate, as procedurally unconscionable to at least some degree.” Bridge Fund, 622 F.3d at 1004. Under the facts present here, the arbitration provision contained in the Samsung User Manual is procedurally unconscionable. See, e.g., Ajamian v. CantorCo2e, L.P., 137 Cal. Rptr. 3d 773 (Cal. Ct. App. 2012) (arbitration provision in employment agreement was procedurally unconscionable and unenforceable because “it was based on a standardized form, drafted and imposed by a party of superior bargaining strength, and left Ajamian with only the option of adhering to the contract or rejecting it”); Lima, 886 F.Supp.2d at 1179-80 (arbitration provision in limited warranty was procedurally unconscionable and unenforceable because purchaser “had no ability to negotiate the terms” since the warranty “arrived on a preprinted form in a box along with his monitor.”); Zaborowski, 2013 U.S. Dist. LEXIS 62484 at *6 (arbitration provision in services agreement was procedurally unconscionable and unenforceable because it was a non-negotiable agreement drafted by a party with superior bargaining power); Lau v. Mercedes-Benz USA, LLC, No. CV 11-1940-MEJ, 2012 U.S. Dist. LEXIS 11358 at *6 (N.D. Cal. Jan. 31, 2012) (arbitration provision in sales contract was procedurally unconscionable and unenforceable because the contract was presented “on a take-it-or-leave-it basis” and the consumer “was not afforded an opportunity to negotiate any of the pre-printed terms on the form.”); Lou v. Ma Labs., Inc., No. C-12-05409-WHA, 2013 U.S. Dist. LEXIS 70665 (N.D. Cal. May 17, 2013) (arbitration provision in employment agreement was procedurally unconscionable and unenforceable because it was found in a standardized employment form that was not negotiable).
Defendants will undoubtedly claim that the opt-out provision in the arbitration provision negates any finding of procedural unconscionability. However, opt-out provisions only negate procedural uncsoncionability if they present the contracting party with “an authentic informed choice” and a “meaningful opportunity” to opt-out. Meyer v. T-Mobile USA, Inc., No. C 10-05858-CRB, 2012 U.S. Dist. LEXIS 97732 at *7-8 (N.D. Cal. July 13, 2012). Here, the opt-out provision was hidden on page 246 of the Samsung User Manual in a Section titled “Warranty Information” under a heading entitled “Standard Limited Warranty.” Plaintiff was wholly unaware of the provision even after receiving and reviewing the Samsung User Manual. Exhibit 1 at ¶8. Under these circumstances, Plaintiff did not have a meaningful opportunity to opt out of the arbitration provision. Moreover, even if the opt-out provision had been conspicuous, the arbitration provision remains unconscionable because the opt-out required an affirmative rejection by Plaintiff within 30 days:
the arbitration provision at issue here is procedurally unconscionable to a high degree. Lima had no ability to negotiate the terms of the Limited Warranty. It arrived on a preprinted form in the box along with his monitor. Moreover, this was not a typical agreement of adhesion offered on a “take it or leave it” basis. Lima could not simply “leave it.” He needed to affirmatively reject the Limited Warranty by notifying Gateway and returning the monitor. This affirmative duty was further oppressive because Lima had a very short time—15 days—within which to make his decision.
Lima, 886 F.Supp.2d at 1182.
2. The Samsung arbitration provision is procedurally unconscionable because it was a surprise to Plaintiff.
The Samsung arbitration provision is also procedurally unconscionable because it was a surprise to Plaintiff. “Procedural surprise focuses on whether the challenged term is hidden in a prolix printed form or is otherwise beyond the reasonable expectation of the weaker party.” Parada v. Sup. Ct. of Orange Cty., 98 Cal. Rptr. 3d 743, 757 (Cal. Ct. App. 2009); Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1280 (9th Cir. 2006) (“surprise involves the extent to which the supposedly agreed-upon terms are hidden in a prolix printed form drafted by the party seeking to enforce them.”). Here, as set forth above, the arbitration provision was a surprise to Plaintiff:
The arbitration provision is found in a single sentence on page 245 of a 263 page document. It is on the fourth page of a section of the Samsung User Manual entitled “Section 12: Warranty Information.” The heading of the section is “Standard Limited Warranty.” The arbitration provision is found immediately after a sub-heading entitled “What is the procedure for resolving disputes?” The arbitration provision is in all caps, but is not in bold as are many of the headings in the Samsung User Manual. The paragraph containing a class action waiver is not in all caps or bold. Nothing in the Samsung User Manual alerted me to the fact that it contained an arbitration provision or class action waiver. . . . I was surprised to learn that the Samsung User Manual contained an arbitration provision and a class action waiver.
Exhibit 1 at ¶¶8, 10. For this additional reason, the arbitration provision is procedurally unconscionable and unenforceable. See, e.g., Lau, 2012 U.S. Dist. LEXIS 11358 at *23 (“[t]he location of an arbitration clause on the back of a dense pre-printed from where the purchaser is not required to sign does relatively little to notify the consumer that such clause exists.”); Zabarowksi, 2013 U.S. Dist. LEXIS 48536 at *10 (“[S]urprise is present in the agreement. The arbitration clause appears in paragraph twenty of twenty-three paragraphs. It is not set apart from the rest of the agreement in any way such as highlighting or outlining; the signature line is on the following page and does not require a separate signature.”); Bruni v. Didion, 73 Cal. Rptr. 3d 395, 413 (Cal. Ct. App. 2008) (court found surprise where arbitration provisions took up “roughly one full page of a 30-page booklet” that plaintiffs were never asked to sign or initial); Lima, 886 F.Supp.2d at 1182 (“the surprising way in which Lima learned about the arbitration provision underscores the high degree of procedural unconscionability present.”).
Defendants cite to several cases that found arbitration provisions were enforceable. However, all of those cases except Carwile (in which the court never addressed unconscionability) involved the arbitration provision found in ATT’s standard service agreement. By contrast to the arbitration provision found on page 245 of the Samsung User Manual under the “Warranty” section, the ATT arbitration provision is found in a separate section at the very top of the first page of the agreement and is in all caps and bold:
WIRELESS CUSTOMER AGREEMENT (“Agreement”)
“AT&T” or “we,” “us,” or “our” refers to AT&T Mobility LLC, acting on behalf of its FCC-licensed affiliates doing business as AT&T. “You” or “your” refers to the person or entity that is the customer of record.
PLEASE READ THIS AGREEMENT CAREFULLY TO ENSURE THAT YOU UNDERSTAND EACH PROVISION, INCLUDING OUR USE OF YOUR LOCATION INFORMATION (SEE SECTION 3.6). THIS AGREEMENT REQUIRES THE USE OF ARBITRATION ON AN INDIVIDUAL BASIS TO RESOLVE DISPUTES, RATHER THAN JURY TRIALS OR CLASS ACTIONS, AND ALSO LIMITS THE REMEDIES AVAILABLE TO YOU IN THE EVENT OF A DISPUTE.
Dkt 11-2. It is not buried on page 246 of the agreement. It is not contained in a section relating to limited warranties. It is the first thing a customer sees when he reviews his cellular contract with ATT. It is thus no surprise that courts have found that the ATT arbitration provision is not procedurally unconsiconable. See, e.g., Blau v. AT&T Mobility, No. C 11-00541-CRB, (N.D. Cal. Jan. 3, 2012) (noting that the arbitration provision in the ATT wireless service agreement was “up front and bold.”). If anything, the stark contrasts between the ATT arbitration provision and the Samsung arbitration provision only enforce Plaintiff’s argument of unconscionability.
3. The Samsung arbitration provision is procedurally unconscionable because it failed to attach the applicable AAA Commercial Arbitration Rules.
The Samsung arbitration provision states that it is governed by the AAA Commercial Arbitration Rules. However, the rules themselves are not attached. For this additional reason, the arbitration provision is procedurally unconscionable. “Our court of appeals has found that when rules are not attached, procedural unconscionability is injected.” Raymundo v. ACS State & Local Solutions, Inc., No. C 13-00442-WHA, 2013 U.S. Dist. LEXIS 70141 at *10 (N.D. Cal. May 16, 2013); see also Pokorny v. Quixtar, Inc., 601 F.3d 987, 997 (9th Cir. 2010) (“Quixtar failed to attach a copy of the Rules of Conduct, containing the full description of the non-binding conciliation and binding arbitration processes, to the registration forms containing the Agreement to Arbitrate, or to the BSMAA. . . . Thus, Plaintiffs were not even given a fair opportunity to review the full nature and extent of the non-binding conciliation and binding arbitration processes to which they would be bound before they signed the registration agreements or the BSMAA.”); Cisneros v. American General Fin. Svcs., Inc., No. C 11-02869-CRB, 2012 U.S. Dist. LEXIS 102948 at *22 (N.D. Cal. July 24, 2012) (“Defendant AGFS’s failure to attach the applicable rules of the National Arbitration Forum (NAF) to the arbitration provision, while not dispositive, also adds to the Agreement’s procedural unconscionability.”); Zullo v. Superior Court, 127 Cal. Rptr. 3d 461, 467 (Cal Ct. App. 2011) (“The absence of the AAA (American Arbitration Association) arbitration rules adds a bit to the procedural unconscionability.”); Trivedi v. Curexo Tech. Corp., 116 Cal. Rptr. 3d 804, 808 (Cal. Ct. App. 2010) (“Numerous cases have held that the failure to provide a copy of the arbitration rules to which the employee would be bound supported a finding of procedural unconscionability.”).
C. The Samsung arbitration provision is substantively unconscionable.
1. The provision was not within the reasonable contemplation of Plaintiff.
The Samsung arbitration provision is substantively unconscionable because its scope was not within the reasonable contemplation of Plaintiff. As set forth in Plaintiff’s declaration, he was surprised by the arbitration provision but especially surprised at its alleged breadth:
I was surprised to learn that the Samsung User Manual contained an arbitration provision and a class action waiver. I was also very surprised that Defendants are claiming that these provisions apply to any and all disputes, even those that have nothing to do with the limited warranty section in which they are found. Given the title of that section, “Standard Limited Warranty,” I would not have expected it to contain an arbitration provision and class action waiver that applied to non-warranty related disputes.
Exhibit 1 at ¶ 10.
Under California law, “a provision in an adhesion contract that does not fall within the reasonable expectations of the weaker or ‘adhering’ party is substantively unconscionable and will not be enforced against him.” Lima, 886 F. Supp.2d at 1183; see also Parada, 98 Cal. Rptr. 3d at 759 (“Substantive unconscionability may be shown if the disputed contract provision falls outside the nondrafting party’s reasonable expectations.”). Where, as here, a broad arbitration provision is found within a consumer warranty, courts have consistently found the provision substantively unconscionable and unenforceable:
Lima’s claims, based on Gateway’s advertising and marketing, have little to do with the Limited Warranty. Even if Lima might have anticipated that the warranty would contain a provision requiring the arbitration of disputes arising from the application of the warranty, it is completely unexpected that an adhesive consumer warranty would require arbitration of all disputes between the parties–including those beyond the scope of the warranty coverage. Because the sweeping scope of the Limited Warranty’s arbitration provision exceeds a consumer’s reasonable expectations, it is substantively unconscionable.
Lima, 886 F. Supp. 2d at 1183; see also Bruni, 73 Cal. Rptr. 3d at 1294 (because arbitration provisions were contained in a warranty, “plaintiffs would reasonably expect that the arbitration provisions would apply only to disputes over the Warranty” and provisions that instead applied to all disputes regarding the subject home were “unforeseeably broad,” “would not have been within plaintiff’s reasonable expectations,” were unconscionable and unenforceable); Damato v. Time Warner Cable, Inc., 13-CV-994, 2013 U.S. Dist. LEXIS 107117 at *24 (E.D.N.Y. July 31, 2013) (“California courts have recognized an arbitration clause may be unconscionably broad where its scope exceeds reasonable expectations, as in a warranty agreement that covered not just the warranty at issue, but all disputes arising between the contracting parties.”).
2. The provision provides for inequitable fee-shifting.
The Samsung arbitration provision is also substantively unconscionable because it provides for inequitable fee-shifting. Specifically, the provision provides that:
- In cases involving total damages of $5000 or less, the arbitrator may award attorneys’ fees to Plaintiff;
- In cases involving total damages of more than $5000, the arbitrator may award attorneys’ fees to the prevailing party.
Dkt 11-1 at p. 245. Under the California Consumer Legal Remedies Act under which Plaintiff has sued, by contrast, Plaintiff would be entitled to attorneys’ fees if he prevailed, regardless of the amount of damages. See Cal. Civ. Coder § 1780(e) (“The court shall award court costs and attorney’s fees to a prevailing plaintiff in litigation filed pursuant to this section.”). And Defendant, if it prevailed, would not be entitled to any award of attorneys’ fees unless there was “a finding by the court that the plaintiff’s prosecution of the action was not in good faith.” Id. Because the arbitration provision makes Plaintiff’s ability to collect his attorneys’ fees permissive and allows the arbitrator to award attorneys’ fees to Defendants without a finding of bad faith, it is substantively unconscionable:
Both California law and the FLSA require an award of fees and costs to the prevailing plaintiff, but not to the prevailing defendant. The Agreement, however, has a fee shifting provision which provides that “[t]he prevailing party, or substantially prevailing party’s costs of arbitration, are to be borne by the other party, including reasonable attorney’s fees.” . . . . Thus, under California law, the fee shifting provision is unconscionable.
Zabarowksi, 2013 U.S. Dist. LEXIS 48536 at *17; see also Ajamian, 137 Cal. Rptr. 3d at 797 (provision that “arguably strips [plaintiff] of her right to recover attorneys’ fees under her California statutory claims” is substantively unconscionable); Wherry v. Award, Inc., 123 Cal. Rptr. 3d 1, 7 (Cal. Ct. App. 2011) (arbitration provision was substantively unconcscionable where it permitted defendant to obtain award of attorneys’ fees without a finding of bad faith).
D. The unconscionable portions of the arbitration provision are not severable.
As set forth above, the arbitration provision found in the Samsung User Manual is both procedurally and substantively unconscionable. It is part of an adhesion contract, it was a surprise to Plaintiff, its breadth and scope were not within Plaintiff’s reasonable expectation. It failed to attach the applicable arbitration rules and it contains an inequitable fee-shifting procedure. Under these circumstances, it is not possible to sever the offending provisions as Defendants suggest. See, e.g., Armendariz, 24 Cal. 4th at 124 (the finding of “multiple unlawful provisions” allows a trial court to conclude that “the arbitration agreement is permeated by an unlawful purpose” and cannot be saved by severance); Zabarowksi, 2013 U.S. Dist. LEXIS 48536 at *24 (“The Court finds that the Agreement is so permeated with unconscionability that it is not severable. It is an adhesive contract that contains oppression and surprise.”); Davis v. O’Melveny & Myers, 485 F.3d 1066, 1084 (9th Cir. 2007) (finding unconscionable provisions unseverable because they “cannot be stricken or excised without gutting the agreement.”). For this reason, Defendants’ Motion should be denied.
IV. Plaintiff’s claims are not within the scope of the arbitration provision.
Even if the arbitration provision in the Samsung User Manual was valid and enforceable, Defendants’ Motion should still be denied because Plaintiff’s claims are not within the scope of the arbitration provision. Here, all of Plaintiff’s claims arise from pre-sale misrepresentations made by Defendants regarding the memory capacity of their Galaxy S4 phone. They do not “arise from” the “sale, condition or performance” of the phone as Defendants claim. Moreover, as for the sale of the phone, Defendants did not even sell the phone, ATT did. As for the “condition” of the phone, Plaintiff’s First Amended Complaint makes no allegations or complaints about the phone’s “condition.” As for the phone’s “performance,” Plaintiff is not suing because the phone had less than 16 GB of free storage. He is suing because Defendants failed to disclose this fact and made misrepresentations regarding the phone’s memory capacity. His claims are based solely on these pre-sale misrepresentations, not on the actual performance of the phone. In other words, without the misrepresentations, Plaintiff would have no case. And nothing in the arbitration provision, which Defendants drafted, mentions claims arising from misrepresentations or omissions by Defendants. Had they wanted the arbitration provision to cover such claims, they could have drafted the arbitration provision accordingly. They did not. Their Motion should therefore be denied.
V. The ATT arbitration provision cannot be enforced by Defendants.
Recognizing the unenforceability of their own arbitration provision, Defendants seek to take advantage of the arbitration provision in the Wireless Customer Agreement between Plaintiff and ATT. Defendants, non-parties to the agreement, claim that they are entitled to enforce it under the doctrine of equitable estoppel. Motion at 17. But under California law, “[b]ecause generally only signatories to an arbitration agreement are obligated to submit to binding arbitration, equitable estoppel of third parties in this context is narrowly confined.” Murphy v. DirecTV, Inc., No. 11-57163, 2013 U.S. App. LEXIS 15580 at *22 (9th Cir. July 30, 2013). In fact, the Ninth Circuit recently stated that “we have never previously allowed a non-signatory to invoke equitable estoppel against a signatory plaintiff.” Rajagopalan v. Noteworld, LLC, No. 12-35205 at *7 (9th Cir. May 20, 2013). Under California law, a non-signatory may invoke an arbitration provision only when:
- a signatory must rely on the terms of the written agreement in asserting its claims against the nonsignatory or the claims are intimately founded in and intertwined with the underlying contract; or
- the signatory alleges substantially interdependent and concerted misconduct by the nonsignatory and another signatory and the allegations of interdependent misconduct are founded in or intimately connected with the obligations of the underlying agreement.
Murphy at *23. Here, neither of these conditions exists and Defendants therefore cannot invoke the ATT arbitration provision under the doctrine of equitable estoppel.
A. Defendants cannot show that Plaintiff’s claims rely on or are founded on the ATT Wireless Customer Agreement.
Defendants cannot invoke equitable estoppel because they cannot show that Plaintiff’s claims rely on or are founded on the ATT Wireless Customer Agreement. This first requirement “comports with, and indeed derives from, the very purposes of the doctrine: to prevent a party from using the terms or obligations of an agreement as the basis for his claims against a nonsignatory, while at the same time refusing to arbitrate with the nonsignatory under another clause of that same agreement.” Id.; see also Mundi Union Security Life Ins. Co., 555 F.3d 1042, 1045 (9th Cir. 2009) (“Equitable estoppel precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes.”).
Here, Plaintiff raises statutory consumer protection claims based on Defendants’ misrepresentations regarding the memory capacity of their Galaxy S4 smart phone. None of his allegations are founded on anything in his ATT Wireless Customer Agreement and none of them rely on any of the terms of that agreement to establish his right to relief. For this reason, Defendants cannot invoke equitable estoppel to enforce the arbitration provision in the ATT agreement. See, e.g., Id. (non-signatory defendant could not invoke arbitration provision because the resolution of the plaintiff’s claim did “not require the examination of any provisions” of the agreement); Murphy, 2013 U.S. App. LEXIS 15580 at *27 (court refused to allow Best Buy to invoke arbitration provision in DirecTV customer agreement because although “Plaintiff’s claims on some abstract level require the existence of the Customer Agreement,” “Plaintiffs rely not on the Customer Agreement, but on Best Buy’s’ alleged words and deeds in the course of transactions leading to the acquisition of equipment”); Rajagopalan, 2013 U.S. App. LEXIS 10055 at *8 (court refused to apply equitable estoppel where plaintiff was pursuing statutory claims and did not allege that anyone breached the agreement containing the arbitration provision); In re Toyota Motor Corp. Unintended Acceleration, 838 F.Supp.2d 967, 994 (C.D. Cal. 2012) (court refused to allow Toyota to invoke equitable estoppel to raise arbitration provision in sales agreements between plaintiffs and Toyota dealers because the plaintiffs alleged fraud and consumer protection claims based on Toyota’s cover-up of safety defects and not claims based on the terms of those agreements or the obligations created by them).
In the case of Carwile v. Samsung Telecommunications America, LLC, Case No. 12-cv-5660-CJC(JPRx), Dkt No. 31 (C.D. Cal. Jan. 23, 2013), Judge Cormac Carney rejected Samsung’s attempt to invoke an arbitration provision in a wireless service agreement between the plaintiff and Sprint. In that case, the plaintiff alleged claims based on a defect in her Samsung Galaxy S mobile phone. Samsung argued that an arbitration provision in her wireless service agreement with Sprint required her to arbitrate her claims against Samsung. The court disagreed, noting that, as here, “Ms. Carwile’s claims are not intertwined with any provisions in the Service Agreement. Her claims alleged defects with her Samsung phone and rely on Samsung’s warranties, not on any terms or conditions contained in the Service Agreement.” Id. at p. 5. The court therefore denied Samsung’s motion. This Court should do likewise.
Defendant claims that it may invoke equitable estoppel because Plaintiff has brought claims relating to Samsung’s advertising and “[t]he AT&T Agreement expressly governs advertising-related claims.” Motion at 18. This argument completely misses the mark. The proper inquiry is not whether the agreement to which the movant is a non-signatory contains a release of the type of claim brought by the plaintiff. If that were the case, then a non-signatory could always invoke an arbitration agreement if the agreement were broad enough. Rather, the proper inquiry is whether the plaintiff’s claims must rely on the terms of the agreement containing the arbitration provision. See, e.g., Kramer v. Toyota Motor Corp., 705 F.3d 1122, 1129 (9th Cir. 2013) (“[M]erely mak[ing] reference to an agreement with an arbitration clause is not enough. Equitable estoppel applies when the signatory to a written agreement containing an arbitration clause must rely on the terms of the written agreement in asserting [its] claims against the nonsignatory.”).
B. Defendants cannot show that Plaintiff alleges interdependent and concerted misconduct between Defendants and ATT.
Defendants are also unable to invoke equitable estoppel because they cannot show that Plaintiff alleges interdependent and concerted misconduct between Defendants and ATT. Samsung tries to cobble together evidence of concerted misconduct by noting that in his Original Complaint, Plaintiff pointed out that there were placards next to the Galaxy S4 at the ATT store where he purchased his phone. But Defendants offer no evidence that any such placards were prepared by ATT and ignore the fact that Plaintiff’s First Amended Complaint clarified that he did not rely on any misrepresentations or omissions of ATT. See Plaintiff’s First Amended Complaint at ¶22:
Plaintiff denies that ATT was a party to any of the actionable misrepresentations or omissions set forth herein. All of the misrepresentations and omissions at issue in this lawsuit were those of Defendants, and not ATT. This case involves misrepresentations and omissions made by the manufacturers of Plaintiff’s phone, Defendants herein, not misrepresentations or omissions by the retailer of Plaintiff’s phone, ATT. Plaintiff therefore specifically denies that his claims herein are in any way “intertwined’ with ATT, ATT’s conduct or any agreement between Plaintiff and ATT.
Plaintiff has also clarified the misrepresentations he relied upon in the attached Declaration:
At the time I purchased my phone, I also signed up for wireless service with ATT. However, I did not rely on any statements by ATT when purchasing my Galaxy S4 phone. In fact, I am not aware of any statements made by ATT regarding the phone. The only statements I relied on were statements made by Defendants on their website and on the outside of the box the phone came in.
Exhibit 1 at ¶4. Because Plaintiff does not allege any collusion or misconduct by ATT, Defendants cannot invoke equitable estoppel. See, e.g., Carwile, Dkt No. 31 at 6 (refusing to allow Samsung to apply equitable estoppel because the plaintiff “does not allege that Sprint engaged in any misconduct, or that it colluded with Samsung in any way.”).
Finally, even if Plaintiff asserted misconduct or collusion by ATT, it would not be enough to allow Defendants to invoke the arbitration provision in the ATT Wireless Customer Agreement. That is true because even if Plaintiff had alleged that ATT misrepresented the memory capacity of Plaintiff’s phone or colluded with Samsung in its misrepresentations, such allegations would have nothing to do with the terms of the ATT Wireless Customer Agreement itself. As the Ninth Circuit has explained:
Even if Toyota were correct that Plaintiffs allege a pattern of concealment between Toyota and the dealerships, these allegations are not connected to the Purchase Agreements. Rather, like the other allegations in the First Amended Complaint, the allegations of collusion are not “inextricably bound up with the obligations imposed by the agreement containing the arbitration clause.” Plaintiffs’ allegations alone cannot trigger equitable estoppel under California contract law.
Kramer, 705 F.3d at 133; see also Murphy, 2013 U.S. App. LEXIS 15580 at *30-31 (“Mere allegations of collusion are insufficient to trigger equitable estoppel. Even where a plaintiff alleges collusion, ‘[t]he sine qua non for allowing a nonsignatory to enforce an arbitration clause based on equitable estoppel is that the claims the plaintiff asserts against the nonsignatory are dependent on or inextricably bound up with the contractual obligations of the agreement containing the arbitration clause.’ As we have already explained, Plaintiff’s claims do not bear the requisite relationship to the Customer Agreement to warrant application of equitable estoppel. Thus, under California law, Plaintiffs are not equitably estopped from litigating their claims against Best Buy.”). For all of the foregoing reasons, Defendants may not invoke the arbitration provision in the ATT Wireless Customer Agreement.
Defendants’ Motion should be denied because Plaintiff never assented to the Samsung arbitration provision at issue. Moreover, that provision is both procedurally and substantively unconscionable. For that reason, the entire provision, including its class action waiver, is unenforceable. The ATT arbitration provision is likewise unenforceable because Defendants are non-signatories and have not established the elements of equitable estoppel. Finally, even if the Samsung arbitration provision was enforceable, Plaintiff’s specific claims do not fall within its scope. For all of these reasons, Defendants’ Motion should be denied.
DATED: August 19, 2013
HEYGOOD, ORR & PEARSON
/s/ Charles W. Miller
CHARLES W. MILLER
CA SBN 276523
ERIC D. PEARSON
Texas Bar No. 15690472
HEYGOOD, ORR & PEARSON
2331 West Northwest Highway, 2nd Floor
Dallas, Texas 75220
Phone: (214) 237-9001
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