Were the terms in AT&T's two-year service agreement for iPhone customers deceptive? Plaintiffs in a class action suit against Apple and AT&T Mobility believe so and Wednesday, a federal court in Northern California agreed there was enough evidence to let the case continue. In doing so, the District Court for Northern California dismissed AT&T's motion for arbitration and denied Apple's motion to dismiss the case. Apple could not be reached for comment.

The companies are charged specifically with violations of federal antitrust laws and other consumer protection laws. The complaint alleges Apple (NASDAQ: AAPL) and AT&T (NYSE: T) restricted voice and data services to the iPhone after signing the two-year service agreement (common to many phone plans), but did not reveal those restrictions at time of purchase.

First generation iPhones were sold at Apple and AT&T stores but the customer had to do the activation on their own at home. Other cell phone companies perform activation in the store, and Apple switched to that process as well for the iPhone 3G launch in July.

The ruling comes at a time of upheaval in the mobile device market, sparked partly by Apple's introduction of the iPhone last year. More recently, phone giants like Verizon and Nokia are moving to make their devices more open to outside developers, while the first device based on Google's Android software was released last month.

The plaintiffs argue last year's version 1.1.1 upgrade of the iPhone's operating system wasn't merely an improvement offering new features for consumers, but as a way of "retaliating against consumers who had unlocked their iPhones or installed unapproved" third party applications. Apple knew, the suit says, the update would "brick," or damage, some iPhones that were unlocked or contained non-Apple sanctioned software.

As proof, the suit points to an Apple press release that said installing version 1.1.1 "will likely result in the modified iPhone becoming permanently inoperable when a future Apple-supplied iPhone software update is installed." The suit also states consumers who's unlocked iPhones were damaged as a result of installing the update were told they had breached the warranty.

One sticking point; the terms of service for the iPhone states that disputes be settled through binding arbitration or small claims court, which is what prompted AT&T Mobile to move for arbitration.

However, the plaintiffs in the case argue that under California law the agreement for arbitration is "unconscionable' and should not apply, noting that iPhone buyers don't see the Terms of Service agreement until they return home with their new iPhone and connect to the Internet. The court ruling states the arbitration agreement is "unconscionable under all relevant state laws."

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Creative Strategies analyst Ben Bajarin said he'd be shocked if Apple and AT&T don't appeal. "It's currently at the lowest court level," he told InternetNews.com. "Apple can appeal and I'm sure it will. They can fight this on any number of different ways I'm sure."