[Docs. Nos. 24, 28, 32, 36]
SABRAW, District Judge.
In this putative class action, Plaintiffs assert that Defendants — cellular phone companies and other entities involved with the sale of wireless telecommunication services — have engaged in the unfair and deceptive practice of charging consumers sales tax on the full retail value of cellular phones that were advertised as "free" or at substantial discounts, in violation of California's Unfair Competition Law ("UCL"), Cal. Bus. & Prof.Code § 17200, et. seq., and False Advertising Law ("FAL"), Cal. Bus. & Prof.Code § 17500, et. seq. In addition, based on these alleged violations, Plaintiffs seek damages and injunctive relief under the Consumer Legal Remedies Act ("CLRA"), Cal. Civ.Code § 1770, et. seq.
Presently before the Court are two motions. First, Defendants T-Mobile USA, Inc. ("T-Mobile") and Cingular Wireless ("Cingular") have filed separate motions to compel Plaintiffs Jennifer L. Laster ("Laster") and Elizabeth Voorhies ("Voorhies") to arbitration, based on the arbitration clauses contained in their wireless service contracts. In addition, Defendants Verizon Wireless and Go Wireless, Inc. have filed a joint motion under Fed. R.Civ.P. 12(b)(6) to dismiss Plaintiffs' First Amended Class Action Complaint ("FAC") for failure to state a claim. Defendants T-Mobile and Cingular have joined that motion. On October 28, 2005, the Court heard oral argument on both motions. For the reasons discussed below, the Court denies T-Mobile and Cingular's motions to compel arbitration, and grants Defendants' collective motion to dismiss Plaintiffs' UCL and FAL claims without prejudice. Further, the Court grants Defendants' motion to dismiss Plaintiffs' CLRA damages claim with prejudice.
FACTUAL AND PROCEDURAL BACKGROUND
Defendants are engaged in the business of marketing and selling wireless telecommunications products, including cellular phones, accessories and service. These products are often sold as part of a "bundled" transaction, whereby the consumer receives a free or significantly discounted cellular phone, in exchange for agreeing to a wireless service contract for a specified duration; however, when Defendants offer the free or substantially discounted phone as part of a bundled transaction, they generally charge consumers sales tax (approximately 7.75%) based on the full retail value of the phone. Plaintiffs contend this practice is improper because a phone advertised as "free" should not include sales
On November 14, 2004, Voorhies entered into bundled transaction to obtain a new cellular phone and wireless service from Cingular, through its authorized agent, Go Wireless, in Poway, California. (Plaintiffs' FAC at ¶ 5.) In conjunction with the purchase of the service package, Voorhies was not charged any amount for the phone. (Id.) However, Defendants charged Voorhies a total of $10.31 in sales tax, based on the retail value of the phone. (Id.) At the time Voorhies entered into the transaction, she was provided with a copy of Cingular's one page "Wireless Service Agreement," which provides in its "Contract Provisions" section:
(See Green Decl. at ¶¶ 6 & 7; Service Agreement, attached thereto) (emphasis added).
The Service Agreement further provides:
(See id.) (emphasis added).
Voorhies also received at that time a copy of Cingular's "Terms of Service," which is a thirteen page document detailing the terms and conditions of Cingular's service. (Green Decl. at ¶ 10.) The Terms of Service, at page 10, includes a section entitled "Arbitration," which purports to waive the consumer's rights to (a) file claims in a court of law against Cingular, and (b) participate in a class action lawsuit against Cingular. Specifically, Cingular's arbitration clause provides:
(Cingular's Terms of Service at 10-12, attached to Green Decl.) (emphasis in original).
After Voorhies received copies of the Wireless Service Agreement and Terms of Service, she was — pursuant to Cingular's procedures for activation of cellular service — directed to call a number provided by Cingular for electronic activation of phone service. (Green Decl. at ¶ 11.) Voorhies was then prompted to execute an electronic signature by selecting the "Yes" option using her telephone keypad in response to the statement: "You agree to the terms as stated in the Wireless Service Agreement and Terms of Service." (Id. at ¶ 12.) If Voorhies did not respond "Yes" to this question, the system would automatically decline her service contract, and her phone would not be activated. (Id.) Voorhies agreed to the terms, and her phone was activated. (Id. at ¶ 13.)
On February 23, 2005, Laster entered into a bundled transaction with T-Mobile at its Mission Valley Center Store in San Diego, California, whereby she purchased a new phone and activated cellular service. (Plaintiffs' FAC at ¶ 3; Chang Decl. at ¶ 2.) When Laster entered into the transaction, she signed a one page Service Agreement which identified her plan rate and the equipment she purchased. (Chang Decl. at ¶ 2.) The Service Agreement neither mentioned arbitration nor incorporated by reference such a provision. After Laster signed the agreement, she received a one page transaction receipt which indicated, among other things, that while T-Mobile did not charge any amount for the phone, it was charging $28.22 for sales tax based on the full retail value of the phone. (Id.)
In addition to receiving a new phone, Laster was provided with a copy of T-Mobile's fifty-two page "Welcome Guide", which was placed inside the sealed box accompanying her new phone. (Id. at 3.) The Welcome Guide includes information about the phone's features and service, as well as the "Terms and Conditions" of its Service Agreement. Similar to Cingular, T-Mobile's Terms and Conditions includes an arbitration clause and waiver of class action participation. T-Mobile's arbitration clause provides:
(T-Mobile's Welcome Guide, § 4 (Terms and Conditions) at ¶¶ 3 & 4, attached as
In May of 2005, Laster, Voorhies, and an additional named Plaintiff in this lawsuit, Andrew Thompson, each filed suits in the Superior Court of San Diego County. Subsequently, two of the cases were removed to this Court pursuant to the Class Action Fairness Act of 2005 ("CAFA"), 28 U.S.C. §§ 1711, et. seq. The third action against Defendants was dismissed without prejudice.
On August 12, 2005, Plaintiffs filed their FAC with this Court against Defendants. Plaintiffs allege for themselves and on behalf of all consumers who purchased a cellular phone as part of a bundled transaction, that Defendants' practice of advertising "free" or significantly discounted phones, while charging sales tax on the full retail value of the phones, constitutes misleading and unlawful business acts and practices under California's FAL, UCL and CLRA. Defendants challenge the FAC through their motions to compel arbitration and to dismiss. These motions are addressed below.
The Federal Arbitration Act ("FAA") governs arbitration agreements in contracts involving transactions in interstate commerce. 9 U.S.C. § 1; Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Congress intended courts to construe commerce as broadly as possible. Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir.1999). Pursuant to Section 2 of the FAA, arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. In determining whether to compel a party to arbitration, a district court may not review the merits of the dispute; rather, the court must limit its inquiry to: (1) whether a valid agreement to arbitrate exists, and, if it does (2) whether the agreement encompasses the dispute at issue. Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir.2000). Finally, a court interpreting an arbitration agreement must give due regard to the federal policy favoring arbitration; ambiguities as to the scope of the arbitration clause are resolved in favor of arbitration. Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995); AT & T Techs. Inc. v. Comm. Workers of America, 475 U.S. 643, 650, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986) ("in the absence of any express provision excluding a particular grievance from arbitration . . . only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail.")
T-Mobile and Cingular contend Laster and Voorhies are bound by the terms of the arbitration agreements contained in their wireless service agreements, and therefore, this Court is not the proper forum to adjudicate their claims. Laster and Voorhies respond by arguing that the arbitration clauses are not enforceable against them because the subject provisions are unconscionable.
While federal policy favors arbitration agreements, federal courts rely on state law when addressing issues of contract
The unconscionability analysis begins with an inquiry into whether the contract is one of adhesion. See Armendariz v. Foundation Health Psychcare Services, 24 Cal.4th 83, 113, 99 Cal.Rptr.2d 745, 6 P.3d 669 (Cal.2000). An adhesion contract is a "standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it." Id. at 113, 99 Cal.Rptr.2d 745, 6 P.3d 669 (citation omitted). An adhesion contract is unconscionable when both procedural and substantive unconscionability are present. Id. at 114, 99 Cal.Rptr.2d 745, 6 P.3d 669. Procedural and substantive unconscionability, however, "need not be present in the same degree." Id. When great substantive unconscionability is present, less procedural unconscionability is required before the agreement will be invalidated. Id. Finally, a party challenging an arbitration agreement has the burden to prove both procedural and substantive unconscionability. Crippen v. Central Valley RV Outlet, Inc., 124 Cal.App.4th 1159, 1165, 22 Cal.Rptr.3d 189 (2004).
a. Procedural Unconscionability
Procedural unconscionability concerns the manner in which the contract was negotiated and the circumstances of the parties at that time. A & M Produce Co. v. FMC Corp., 135 Cal.App.3d 473, 491, 186 Cal.Rptr. 114 (1982). The procedural element of unconscionability focuses on two factors: oppression and surprise. Id. at 486, 186 Cal.Rptr. 114. The oppression component arises from an inequality of bargaining power of the parties to the contract and an absence of real negotiation or a meaningful choice on the part of the weaker party. California Grocers Assn. v. Bank of America, 22 Cal.App.4th 205, 214, 27 Cal.Rptr.2d 396 (1994). "Surprise involves the extent to which the terms of the bargain are hidden in a `prolix printed form' drafted by a party in a superior bargaining position." Crippen, 124 Cal. App.4th at 1165, 22 Cal.Rptr.3d 189 (citation omitted).
T-Mobile and Cingular do not dispute that the arbitration agreements between the parties were part of a non-negotiable form contract. Further, they do not challenge Plaintiffs' argument that a disparity in bargaining power exists between the parties. However, T-Mobile and Cingular argue that Laster and Voorhies cannot establish that the agreements are procedurally unconscionable due to "oppression" because they were not compelled to accept the terms contained in the service contracts; Laster and Voorhies were "able to choose from a host of wireless carriers offering services in a given market" — including carriers that do not insist on arbitration of disputes. (T-Mobile's Motion to Compel at 10-11; Cingular's Motion to Compel at 7.) Defendants cite Morris v. Redwood Empire Bancorp, 128 Cal.App.4th 1305, 1319-20, 27 Cal.Rptr.3d 797 (2005), for the proposition that "the `oppression'
In Ting v. AT & T, 319 F.3d 1126, 1149 (9th Cir.2003), the Ninth Circuit addressed this very argument. There, AT & T mailed a Consumer Services Agreement (CSA) to its customers along with the customer's monthly bill and other materials. The CSA purported to mandate arbitration of claims and bar customers from pursuing claims against AT & T on a classwide basis. AT & T argued its arbitration provision in the CSA was not procedurally unconscionable because "the third largest carrier, Verizon, had no arbitration agreement in [its] contract and . . . consumers therefore had the option of rejecting AT & T's CSA and switching to a competitor." Id. at 1149.
The court in Ting dismissed the argument, first noting: "A contract is procedurally unconscionable if it is a contract of adhesion, i.e., a standardized contract, drafted by the party of superior bargaining strength, that relegates to the subscribing party only the opportunity to adhere to the contract or reject it." Ting, 319 F.3d at 1148-49 (emphasis added) (citing Flores v. Transamerica HomeFirst, Inc., 93 Cal.App.4th 846, 853, 113 Cal.Rptr.2d 376 (2001) ("`A finding of a contract of adhesion is essentially a finding of procedural unconscionability.'")) In addition, the court in Ting held: "[E]ven assuming such alternatives matter under California law, see Armendariz, . . . (rejecting contention that availability of alternative sources of supply affected the procedural unconscionability analysis), it nonetheless fails to overcome the district's court's well-founded conclusion that the CSA is a procedurally unconscionable contract [because AT & T imposed the CSA on its customers without opportunity for negotiation, modification, or waiver]." Id. Accordingly, Ting holds: (1) a contract of adhesion is procedurally unconscionable, and (2) even if a court were to consider the availability of alternative sources of supply, the court must evaluate the consumer's opportunity to negotiate the arbitration provision.
Here, it is undisputed Laster and Voorhies were presented with non-negotiable form contracts. They could either accept the contract with arbitration, or reject it. Under Ting, such "take it, or leave it" contracts are deemed to be procedurally unconscionable contracts of adhesion. The only question for this Court, therefore, is where on the continuum of procedural unconscionability do the subject agreements fall?
With respect to T-Mobile, the one page Service Agreement Laster signed does not include any reference to arbitration or waiver of class action participation. Rather, Laster was theoretically notified of the arbitration clause through T-Mobile's fifty-two page "Welcome Guide", which was placed inside the sealed box containing her
Under these circumstances, Laster had no meaningful opportunity to negotiate the terms of the service contract before purchasing the phone. In other words, she had no opportunity to switch to another competitor until after she purchased the phone. On this record, it appears Laster's ability to "negotiate" depended upon her ability to discover the arbitration provision on her own and then cancel her service within 14 days of purchasing and activating her phone. The manner in which the T-Mobile's arbitration provision was presented to Laster clearly suggests procedural unconscionability at a heightened level.
Cingular's arbitration clause, on the other hand, presents a closer call. In contrast to Laster, Voorhies was provided with both Cingular's Service Agreement (which specifically references arbitration) and its Terms of Service at the time she purchased the phone. As Cingular notes, "At that time, Voorhies had neither invested in a telephone nor become reliant upon the telephone number obtained when she entered into her agreement." (Cingular's Motion to Compel at 8.) In other words, Voorhies could, at that point, elect to "leave it" and go with a competitor, such as Verizon.
However, under Ting, Cingular nonetheless presented Voorhies with a take-it-or-leave-it form contract that is deemed to be adhesive and thereby, procedurally unconscionable. Similar to Laster, Voorhies had no real opportunity to "negotiate" the arbitration provision, as it was non-negotiable. She was, however, able to negotiate the transaction in the sense that she could at an early stage reject Cingular's terms and choose a competitor. As Cingular concedes, "At most, [under these circumstances] adhesiveness . . . puts Cingular's contracts on the low end of the spectrum of procedural unconscionability." (Cingular's Motion to Compel at 7.) This Court would agree.
T-Mobile and Cingular next argue that Laster and Voorhies fail to show the "surprise" element of procedural unconscionability. In support, Defendants argue the terms of the arbitration agreements are adequately disclosed in their service contracts. (T-Mobile's Motion to Compel at 11; Cingular's Motion to Compel at 8.)
As noted, Laster was not made aware of the terms of the arbitration clause until after she had purchased the phone. The surprise element is therefore clearly established by Laster against T-Mobile.
Cingular argues, however, the "surprise" element is lacking because it "gave its arbitration provisions special prominence in its [Service] Agreement." (Cingular's Motion to Compel at 8.) While it is true Cingular's Service Agreement provides notice of arbitration, the agreement fails to mention the terms of arbitration or its classwide arbitration bar. In addition, the actual arbitration clause and class action waiver can only be determined by the customer by reading a separate document — specifically, pages ten through twelve of Cingular's thirteen page Terms of Service booklet. A modicum of surprise therefore exists under these circumstances.
b. Substantive Unconscionability
Plaintiffs argue T-Mobile and Cingular's arbitration clauses are substantively unconscionable because they include a waiver of class action rights, citing the recent California Supreme Court decision in Discover Bank v. Superior Court of Los Angeles, 30 Cal.4th 148 (Cal.2005). Defendants counter that: (1) Discover Bank does not hold that all such arbitration provisions are unconscionable; (2) under Discover Bank's test for substantive unconscionability, Plaintiffs fail to show the arbitration provisions in dispute are unconscionable; and (3) even if this Court were to conclude that Discover Bank invalidates class action waivers in all consumer arbitration provisions, that holding would be preempted by Section 2 of the FAA.
In Discover Bank, defendant, a credit card company, sent an arbitration agreement (as an amendment to its existing customer service agreement) in a "bill stuffer" along with its customers' monthly invoices. The arbitration agreement included a waiver of classwide arbitration. Plaintiffs later initiated a class action lawsuit, and Discover Bank moved to compel arbitration. The California Supreme Court held that a waiver of classwide arbitration in a consumer contract of adhesion may be unconscionable under certain circumstances. Specifically, the court concluded:
Discover Bank, 30 Cal.4th at 162-63.
Accordingly, under Discover Bank, arbitration provisions that contain class action waivers are not per se unconscionable. Instead, a classwide arbitration bar is unconscionable only if two factors are present: (1) the class action waiver is contained in a consumer contract of adhesion, in which small amounts of damages are at issue; and (2) it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.
Applying Discover Bank's two-prong test to the present facts leads to the conclusion that the arbitration provisions are substantively unconscionable. As noted, the arbitration clauses are contracts of adhesion because they are non-negotiable, presenting the consumer with only a take-it-or-leave-it option. Further, the dispute between the parties here involves individually small amounts of money — that is, the sales tax (approximately 7.75%) charged to the consumer, based on the retail value of a cellular phone. Thus, the first prong of Discover Bank's unconscionability test is satisfied.
Cingular raises the additional argument that because its arbitration provision provides for the full payment of arbitration costs, as well as reasonable attorney's fees to potential plaintiffs, "`the class-action waiver in its arbitration provision does not serve to insulate [it] from liability that otherwise would be imposed under California law' . . . and hence is not substantively unconscionable under Discover Bank." (Cingular's Motion to Compel at 9-10,13.) Thus, Cingular essentially argues its arbitration provision allows potential plaintiffs to pursue claims against them under a system where the parties are on equal footing; because Cingular would pay a prevailing plaintiff's attorney's fees, it would have no incentive to defend itself in arbitration against a meritorious claim. (Id. at 12.)
The court in Discover Bank considered this argument, and rejected it, holding: "Nor are we persuaded by the rationale stated by some courts that the potential availability of attorney fees to the prevailing party in arbitration or litigation ameliorates the problem posed by such class action waivers. . . . There is no indication . . . attorney fees are an adequate substitute for the class action or arbitration mechanism."
Because T-Mobile and Cingular's service contracts are non-negotiable form contracts, involving an alleged scheme to cheat large numbers of consumers out of small sums of money, the arbitration clauses are substantively unconscionable. Further,
T-Mobile and Cingular argue, in the alternative, that should the Court find the arbitration clauses substantively unconscionable, this Court still must compel Laster and Voorhies to arbitration because the holding in Discover Bank is preempted by the FAA. Section 2 of the FAA provides that "[a]n agreement shall be valid, irrevocable, and enforceable, save upon such grounds that exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. (emphasis added). Likewise, in Perry v. Thomas, 482 U.S. 483, 492-93 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987), the United States Supreme Court held that "an agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, save upon such grounds as exist at law or in equity for the revocation of any contract." (emphasis added.) T-Mobile and Cingular argue that "because the test set forth in Discover Bank is not a rule of general applicability given that it only applies to a limited subset of arbitration agreements and disputes" — the unconscionability test articulated in Discover Bank is preempted by § 2 of the FAA. (T-Mobile's Motion to Compel at 17; Cingular's Motion to Compel at 13.)
In Discover Bank, the court noted a determination that a classwide bar is unconscionable is not preempted by § 2 of the FAA, because such a determination involves principles of state law regarding the "validity, revocability, and enforceability of contracts generally[.]" Discover Bank, 30 Cal.4th at 165. "`Under section 2 of the FAA, a state court may refuse to enforce an arbitration agreement based on generally applicable contract defenses, such as fraud, duress, or unconscionability.'" Id. (citations omitted.) See also Ting, 319 F.3d at 1150, n. 15 ("Because unconscionability is a generally applicable contract defense, it may be applied to invalidate an arbitration agreement without contravening § 2 of the FAA."). The concept of unconscionability, therefore, may be employed as a principle of general applicability to invalidate an arbitration agreement without contravening § 2 of the FAA. Accordingly, the holding of Discover Bank is not preempted by § 2 of the FAA.
Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether the plaintiff will prevail in the action, but whether the plaintiff is entitled to offer evidence in support of the claim. Fed.R.Civ.P. 12(b)(6). See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183, 104 S.Ct. 3012, 82 L.Ed.2d 139 (1984). In answering this question, the Court must assume that the plaintiff's allegations are true and must draw all reasonable inferences in plaintiff's favor. See Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir.1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow the plaintiff to develop the case at this stage of the proceedings. See
Defendants seek dismissal of Plaintiffs' FAC on four grounds: (1) Plaintiffs lack standing to bring their claims under California's UCL and FAL because they fail to adequately plead actual reliance and injury in fact; (2) Plaintiffs cannot allege false or deceptive advertising as a matter of law because consumers are expected to know that California law requires sales tax to be added to advertised items; (3) Plaintiffs' claim for restitution under the UCL and FAL fails because Defendants remitted the taxes collected from consumers to the State Board of Equalization; and (4) Plaintiffs' claim for damages under the CLRA should be dismissed because they fail to allege proper notice of their claim as required by California Civil Code § 1782. These arguments are addressed below.
Section 17200 of the California Business and Professions Code defines "unfair competition" as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising and any act prohibited by [the FAL]." Cal. Bus. & Prof. § 17200. By defining unfair competition to include any "unlawful . . . business act or practice", the UCL permits violations of other laws to be treated as unfair competition that are independently actionable. Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal.4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527 (Cal.1999). As such, any violation of the FAL necessarily violates the UCL. Committee on Children's Television, Inc. v. General Foods Corp., 35 Cal.3d 197, 210, 197 Cal.Rptr. 783, 673 P.2d 660 (Cal.1983).
The FAL, which is codified at Section 17500, provides: "[i]t is unlawful for any person . . . corporation or association, or any employee thereof . . . to disseminate or cause to be so made or disseminated [,] any such statement as part of a plan or scheme with the intent not to sell that personal property or those services, professional or otherwise, so advertised at the price stated therein, or as so advertised." Cal. Bus. & Prof. § 17500. California courts have noted that the FAL prohibits "not only advertising which is false, but also advertising which [,] although true, is either actually misleading or which has a capacity, likelihood or tendency to deceive or confuse the public." Leoni v. State Bar, 39 Cal.3d 609, 626, 217 Cal.Rptr. 423, 704 P.2d 183 (Cal.1985).
Proposition 64, which was approved by California voters on November 2, 2004, amended certain provisions of the UCL and FAL. Before Proposition 64 passed, an uninjured private party could bring a UCL (or FAL) action on behalf of the "general public," and could obtain remedies on behalf of non-parties.
Proposition 64, however, amended Section 17204 of the UCL regarding private plaintiffs to read: "Actions for any relief pursuant to this chapter shall be prosecuted exclusively . . . by any person who has suffered injury in fact and has lost money or property as a result of such unfair competition." Cal. Bus. & Prof.Code § 17204. Section 17203, which was also amended by Proposition 64, now provides, with respect to representative private
Accordingly, after Proposition 64, a person seeking to represent claims on behalf of others must show that (1) she has suffered actual injury in fact, and (2) such injury occurred as a result of the defendant's alleged unfair competition or false advertising. For the reasons set forth below, Plaintiffs adequately allege injury in fact, but fail adequately to allege causation.
With respect to the first prong — injury in fact — Plaintiffs claim they entered into a bundled transaction with Defendants whereby they purchased both a phone and cellular service, and in doing so, were provided with a phone that was falsely advertised as "free" or substantially discounted, when in fact, they were required to pay the sales tax on the full retail value. (FAC at ¶¶ 23, 24, 25, 26 & 31.) Plaintiffs, in essence, contend putative class members were injured by Defendants' "bait-and-switch" practices; that is, consumers were lured in with advertisements for free or deeply discounted phones, yet once in the store, they were charged sales tax based on the full retail value of the phone. (FAC ¶¶ 26 & 31.) Plaintiffs further contend that if Defendants were faithful to their advertisements, they would have absorbed the tax. Instead, according to Plaintiffs, Defendants illicitly shifted the tax burden to their customers ("fleeced" them) once such customers had taken the time and effort to respond to the deceptive advertisements. (Id.) Such allegations sufficiently allege an injury in fact.
Plaintiffs, however, do not include any allegations in their FAC that they relied on Defendants' advertisements in entering into the transactions. While Plaintiffs meticulously describe the allegedly misleading advertisements (as later described in Plaintiffs' pleadings, a "bait-and-switch" leading to a "fleece"), none of the named Plaintiffs allege that they saw, read, or in any way relied on the advertisements; nor do they allege that they entered into the transaction as a result of those advertisements.
The language of the UCL, as amended by Proposition 64, makes clear that a showing of causation is required as to each representative plaintiff. ("Actions for any relief . . . shall be prosecuted exclusively . . . by any person who has suffered injury in fact and has lost money or property as a result of such unfair competition." Cal. Bus. & Prof.Code § 17204 (emphasis added)). Because Plaintiffs fail to allege they actually relied on false or misleading advertisements, they fail to adequately allege causation as required by Proposition 64. Thus, under §§ 17203 and 17204, Plaintiffs lack standing to bring their UCL and FAL claims. Plaintiffs' claims are dismissed with leave to amend to address these deficiencies.
Defendants also seek dismissal of Plaintiffs' claim for damages under the CLRA because they failed to give proper notice to Defendants of their CLRA claim, as required by California Civil Code § 1782. Section 1782(a) provides:
Cal. Civ.Code § 1782(a). Plaintiffs conceded that they failed to comply with the thirty day notice requirement set forth in § 1782, (see Plaintiffs' Opposition at 21), and through a separate filing have requested leave of court to "strike the premature allegation of damages without waiver and without prejudice based upon inadvertence and excusable neglect of counsel." (Id. at 22.) Thus, the only issue presented is whether the Court should dismiss Plaintiffs' CLRA damages claim with or without prejudice.
Defendants argue, based on Von Grabe v. Sprint, 312 F.Supp.2d 1285 (S.D.Cal. 2003), that Plaintiffs' failure to provide adequate notice compels dismissal of the CLRA claim for damages with prejudice. Plaintiffs respond, however, by arguing that the facts in this instance are distinguishable from Von Grabe, because there has been no attempt to mislead the court by including the claim for damages, as the plaintiff did in Von Grabe; rather, the inclusion of the request for damages was "mistakenly, prematurely included [in] the language requesting damages." (Plaintiffs' Opposition at 22.)
In Von Grabe, a cellular phone customer filed claims arising from an equipment replacement program fee charged by a cellular carrier. The plaintiff alleged, among other claims, a claim for damages under the CLRA. Ruling in the context of a motion to dismiss, the court dismissed the plaintiff's CLRA claim with prejudice because he failed to allege proper notice, as required by § 1782(a). In reaching its decision, the court relied on the California Court of Appeal opinion in Outboard Marine Corp. v. Superior Court, 52 Cal.App.3d 30, 124 Cal.Rptr. 852 (1975), which held that "strict application of the [notice] requirement was necessary" to achieve the goals of the CLRA. The court in Outboard Marine noted:
Outboard Marine, 52 Cal.App.3d at 40-41, 124 Cal.Rptr. 852 (emphasis added).
Notably, neither Outboard Marine nor Von Grabe drew a distinction between inadvertence or willful disregard of the notice requirements. Both courts held that a claim for damages under the CLRA requires strict compliance with the notice requirements set forth in § 1782. This Court agrees. Strict adherence to the statute's notice provision is required to accomplish the Act's goals of expeditious remediation before litigation. Because Plaintiffs failed to provide notice to Defendants pursuant to § 1782(a), their claim for damages under the CLRA must be dismissed with prejudice.
This result is not changed by the fact that Plaintiffs also brought a claim under the CLRA for injunctive relief. While § 1782(d) authorizes the filing of an action for injunctive relief without first providing notice to the vendor, the statute further directs that such an action may not be converted into an action for damages unless the consumer first complies with the notice provisions of § 1782(a). Accordingly, § 1782 scrupulously prohibits any action for damages unless its notice provisions are met. As stated, the Legislative goals would be eviscerated if consumers were allowed to sue for damages without first providing the statutorily mandated period for remediation.
Plaintiffs' claim for damages is therefore dismissed with prejudice. Plaintiffs' claim for injunctive relief stands, pursuant to § 1782(d).
CONCLUSION AND ORDER
For these reasons, the Court denies Defendants T-Mobile and Cingular's motion to compel arbitration. In addition, the Court grants without prejudice Defendants' collective motion to dismiss Plaintiffs' claims under the UCL and FAL. Plaintiffs shall file a second amended complaint within 20 days of the date this Order is stamped filed addressing the deficiencies noted herein. Finally, Defendants' motion to dismiss Plaintiffs' claims for damages under the CLRA is granted with prejudice.