MacClelland v. Cellco Partnership d/b/a Verizon Wireless

Background

Teresa MacClelland and other plaintiffs sued Cellco Partnership doing business as Verizon Wireless and Verizon Communications Inc., which the opinion collectively calls Verizon. The plaintiffs sued individually, as private attorneys general, and on behalf of a proposed class of California consumers who currently or formerly had postpaid Verizon wireless plans and were charged an “Administrative Charge.” They alleged that Verizon advertised flat monthly prices but added an undisclosed $1.95 monthly charge and misrepresented the charge as a tax or government-required fee.

The plaintiffs asserted claims under California’s Consumer Legal Remedies Act, False Advertising Law, and Unfair Competition Law. They sought public and private injunctions, restitution, damages, and attorney fees. The complaint also pleaded, as an alternative, breach of the implied covenant of good faith and fair dealing.

Before activating wireless service, each plaintiff had to accept Verizon’s customer agreement. Every version of the agreement contained an arbitration clause and prohibited class arbitration. The plaintiffs did not dispute that they accepted the agreement or that their claims were within the arbitration clause’s scope. Instead, they argued that the dispute-resolution provisions were so unfair that the arbitration agreement could not be enforced.

Delegation of arbitrability

The court first considered whether an arbitrator, rather than the court, should decide the agreement’s enforceability. Verizon argued that the agreement’s reference to the American Arbitration Association’s rules clearly delegated that issue to the arbitrator. The court rejected that argument. The agreement did not quote or attach the rules, and the agreement allowed customers with claims of $10,000 or less to choose either the American Arbitration Association’s rules or the Better Business Bureau’s rules. The court concluded that there was no clear and unmistakable evidence that the customers agreed to let an arbitrator decide whether the arbitration agreement was valid or enforceable.

Unconscionability

Under California law, a contract is unconscionable when it is both procedurally and substantively unconscionable. Procedural unconscionability concerns unfairness in how the contract was presented, while substantive unconscionability concerns terms that are overly harsh or one-sided.

The court found minimal procedural unconscionability because Verizon drafted the agreement and presented it on a “take it or leave it” basis. The customers could not negotiate its terms and had to accept it to activate wireless service. The court held that this finding alone was insufficient to invalidate the arbitration agreement, so the plaintiffs needed to show significant substantive unfairness.

The court considered six challenged provisions:

1. 180-day dispute-notice provision. Customers had to notify Verizon in writing within 180 days of receiving a bill to preserve the right to bring an arbitration or small-claims case about the dispute. Although the provision was technically a notice requirement rather than a lawsuit deadline, the court found that it could function like a shortened limitations period and create a trap for customers. The court found some substantive unconscionability in this provision.

2. Pre-dispute jury waiver. The agreement waived a jury trial if a claim proceeded in court. The court found this waiver unenforceable and substantively unconscionable, but gave it no weight in evaluating the arbitration clause because it applied only when a claim was not arbitrated.

3. Punitive-damages waiver. The agreement limited claims to direct damages and excluded punitive damages. Because punitive damages were available under the Consumer Legal Remedies Act, the court found this provision substantively unconscionable. Although the provision appeared outside the arbitration clause, the court found it intertwined with and enforced through arbitration.

4. Public-injunctive-relief waiver. The agreement allowed an arbitrator to award relief only for the individual claimant. The court held that this prevented the plaintiffs from seeking public injunctive relief—an injunction primarily benefiting the general public—through any forum. Because California law does not allow a contract to waive that right, the court found the provision unenforceable. The court also held that the Supreme Court’s decision in Viking River Cruises, Inc. v. Moriana did not undermine that conclusion.

5. Exculpatory and discovery-related provision. The agreement stated that customers could not rely on documents or statements from sales or customer-service representatives and had no other rights concerning the service or agreement. The court found that this language went beyond an ordinary clause defining the written agreement because it appeared to exclude outside evidence even when such evidence could be used to prove fraud. The court therefore found the provision substantively unconscionable.

6. Mass-arbitration provision. When 25 or more customers represented by the same or coordinated counsel raised similar claims, the provision required the claims to proceed in staged groups. Counsel for each side would select five cases for an initial group of ten, and the remaining claims could not be filed in arbitration until those cases were resolved. The court found that this could delay claims for years, potentially cause claims to expire under the agreement’s limitations provisions, and give Verizon an unfair advantage. The court also found a lack of mutuality because Verizon could apparently use the same law firm in all of its arbitrations while customer counsel could be forced to sideline clients. The court held that this provision was substantively unconscionable.

Severability

The agreement contained provisions allowing invalid terms to be removed. The court nevertheless held that removing the challenged terms was not appropriate. The number and nature of the unfair provisions showed, in the court’s view, a systematic effort to make arbitration an inferior forum rather than a fair alternative to court litigation. The arbitration clause was therefore “permeated” by unconscionability, meaning the unfairness could not be cured by severing individual provisions.

Disposition

Judge Edward Chen denied Verizon’s motion to compel arbitration. The court denied Verizon’s request to stay the proceedings as moot. It also denied Verizon’s request for leave to file a notification concerning a planned change to the customer agreement as moot, and stated that the order disposed of Docket Nos. 20 and 43. The court did not decide whether Verizon actually engaged in false advertising or violated California law.