The Illinois Supreme Court affirmed an appellate court decision which reversed a ruling made by former Madison County Circuit Judge Philip Kardis.
In October 2003 Kardis denied a motion to compel arbitration in a class action case against Cingular Wireless.
In a decision issued Thursday, the Supreme Court granted Cingular's petition for leave to appeal pursuant to Supreme Court Rule 315, to determine whether the prohibition of class arbitration is unconscionable.
"The trial court found the entire arbitration clause unconscionable and, therefore, unenforceable," wrote Justice Rita Garman, who authored the high court's unanimous decision.
"The appellate court found the arbitration clause as a whole to be enforceable, but the prohibition on class arbitration to be both procedurally and substantively unconscionable. Under this ruling, although Cingular is entitled to demand arbitration of plaintiff's individual claim, it cannot preclude arbitration of her (plaintiff's) class claim."
Kardis denied Cingular's motion to compel arbitration finding that the arbitration clause was unenforceable on the basis of unconscionability.
Cingular appealed to the Fifth District which ruled that the "class action waiver was unconscionable, but that it was severable from the remainder of the arbitration clause, which, in keeping with the strong policy in favor of enforcing arbitration agreements."
In May 2005, Appellate Justices' Melissa Chapman, Clyde Kuehn and James Donovan unanimously ruled to reverse and remand, finding that although the arbitration clause is enforceable, the limitation on class arbitration contained therein is unconscionable and, thus, unenforceable.
Represented by the Lakin Law Firm, Donna M. Kinkel sued Cingular on Aug. 8, 2002, alleging that its early termination fee constituted a breach of the service agreement and statutory fraud under the Illinois Consumer Fraud and Deceptive Business Practices Act.
Shortly after the suit was filed, Cingular, represented by Thompson Coburn of Belleville, filed a motion to compel arbitration of her individual claim and stay the litigation, invoking the arbitration clause of the service agreement and sections 2 and 3 of the Federal Arbitration Act (FAA).
In July 2001, Kinkel began her cellular service with Cingular in which she chose a two-year service commitment.
In April 2002, she notified Cingular that she wished to terminate her service. The defendant charged her the early-termination fee of $150, which she paid under protest.
In September 2003, Kinkel filed a first amended complaint, again alleging that the $150 early termination fee is an illegal penalty and further alleged that the ban on class treatment contained in the mandatory arbitration provision is intended by Cingular to further an unlawful scheme to collect an illegal penalty from her and other members of the class.
Kinkel claimed the mandatory arbitration provision prevents her and others from "effectively vindicating their statutory and common law causes of action and facilitates rather than remedies Cingular's fraudulent and unlawful conduct."
Supreme Court opinion
Garman noted that before the court could decide the case, it needed to clarify the precise issue before them.
"The appellate court found the arbitration clause to be enforceable, but the class action waiver to be unconscionable. This appeal was brought by Cingular, to obtain review of the appellate court's ruling with regard to the class action waiver provision. Plaintiff did not seek review of the ruling on the arbitration clause itself. Thus, the enforceability of the arbitration clause itself is no longer at issue. The issue in this appeal is whether the class action waiver is unconscionable," Garman writes.
"The appellate court found the class action waiver in the Cingular service agreement to be substantively unconscionable for two reasons. First, because the cost of litigating or arbitrating a claim for $150 would have approached if not exceeded the potential recovery, consumers in the plaintiff's position are left without an effective remedy in the absence of a mechanism for class arbitration or litigation."
"Second, the limitation is one-sided because commercial entities like Cingular do not have occasion to sue their customers as a class. That is, although both parties ostensibly waived the ability to pursue a class action, the limitation applies, in practice, only to prevent customers " 'from seeking redress for relatively small amounts of money.' "
"In the present case, the underlying claim is that the $150 early termination fee is unenforceable as a penalty."
"The typical consumer may feel that such a charge is unfair, but only with the aid of an attorney will the consumer be aware that he or she may have a claim that is supported by law, and only with the aid of an attorney will such a consumer be able to make the merits of such a claim apparent in arbitration or litigation."
"Cingular similarly seeks to insulate itself from liability to a potential class of customers by enforcing a class action waiver in its standard service agreement. We find that under the circumstances of this case, the class action waiver is unconscionable and unenforceable. These circumstances include a contract of adhesion that requires the customer to arbitrate all claims, but does not reveal the cost of arbitration, and contains a liquidated damages clause that allegedly operates as an illegal penalty. These provisions operate together to create a situation where the cost of vindicating the claim is so high that the plaintiff's only reasonable, cost-effective means of obtaining a complete remedy is as either the representative or a member of a class."
"In sum, we hold that under the circumstances of this case, the waiver on class actions is unconscionable. It is not unconscionable merely because it is contained in an arbitration clause. It is unconscionable because it is contained in a contract of adhesion that fails to inform the customer of the cost to her of arbitration, and that does not provide a cost-effective mechanism for individual customers to obtain a remedy for the specific injury alleged in either a judicial or an arbitral forum. We further hold that the offending clause is severable from the arbitration clause."
"We do not hold that class action waivers are per se unconscionable. It is not unconscionable or even unethical for a business to attempt to limit its exposure to class arbitration or litigation, but to prefer to resolve the claims of customers or clients individually. Indeed, it has been suggested that, as a matter of economic theory, consumers may benefit from reduced costs if companies are allowed to engage in this strategy."
"The unconscionability of class action waivers must be determined on a case-by-case basis, considering the totality of the circumstances."
Chief Justice Thomas and Justice Burke did not take part in the case.