Upholding a California district court ruling, the Ninth Circuit Court of Appeals decreed that a clause contained in the AT&T wireless service contract that requires customers to solve disputes through binding arbitration is unenforceable under California state law. The case at hand stems from AT&T’s effort to compel arbitration in a class action lawsuit in which the plaintiffs allege that AT&T’s offer of a free cell phone to new subscribers is fraudulent as AT&T collects sales tax on the full retail value of the handset. Determining that language in the AT&T customer service agreement that waives the right of complainants to seek class action status violates California “unconscionability” law, the lower court said the plaintiffs could proceed with their class action suit. In an opinion handed down on Wednesday, the three judge appeals court panel said that AT&T’s attempt to force arbitration qualifies as unconscionable under the following three-part test established by Discover Bank v. California Supreme Court: (1) the class action suit seeks “predictably small amounts of damages,” (2) the defendant is accused of “[carrying] out a scheme deliberately to cheat large numbers of customers out of small sums of money,” and (3) customers are precluded from negotiating contract terms. Although AT&T pointed to a new “premium payment” clause in its contract that pays an aggrieved customer $7,500 if the arbitrator grants an award that is greater than AT&T’s last settlement offer prior to arbitration, the court disagreed with AT&T’s claim that the provision makes the arbitration requirement more palatable. Noting that the disputed amount in the case at hand is only $30.22, the court said if a customer decides to pursue arbitration, “predictably, AT&T will simply pay the face value of the claim . . . to avoid potentially paying $7,500.” The court also took issue with AT&T’s argument that California’s unconscionability law is preempted by the Federal Arbitration Act, explaining that the act “does not bar federal or state courts from applying generally applicable state contract law.” Voicing disagreement with the court’s findings, an AT&T official said his company is “studying this ruling and considering our options.”