Federal Court Invalidates AT&T “Class Action Waiver” in Wireless Contract Boilerplate

Several people joined together to bring a class action suit against AT&T Wireless following its merger with Cingular in 2004. The complainants, AT&T Wireless customers, alleged that after Cingular merged with AT&T Wireless in October of 2004, Cingular deliberately degraded AT&T Wireless’ network in order to induce AT&T Wireless customers to transfer their plans to Cingular plans, which they alleged are generally more expensive and less favorable to customers. AT&T, in defense, alleged that the sole relief available would be for the customers to pursue their dispute in either individual arbitration cases or small claims court. In other words, AT&T maintained that class action suits are prohibited by a purported waiver of the right to bring a class action suit that was contained in the "boilerplate" of the standard customer agreements. The US District Court for the Western District of Washington found in favor of the complainants on May 22nd in Coneff v. AT&T Corp. (Case No. C06-944).

Complainants alleged that Cingular’s goal was to encourage AT&T Wireless customers to “upgrade” to Cingular’s network. These “upgrades” required customers to do one or more of the following: (1) pay an $18 transfer fee to Cingular; (2) purchase one or more new phones from Cingular; (3) pay $18 for a SIM chip to operate their current phone; and/or (4) enter into a new service contract with Cingular. They alleged that AT&T Wireless customers who did not agree to such an “upgrade” were left with a choice to either fulfill their contract term with a “degraded” AT&T Wireless service, or pay a $175 early termination fee to cancel service.

As a condition for approval of the merger, the FCC required Cingular to keep AT&T Wireless’ network in place until February of 2008. It was alleged that in July 2006, Cingular began imposing a mandatory $4.99 monthly fee to any AT&T Wireless customer still using the old AT&T network. Complainants also noted that major publications reported that Cingular had “been spending next to nothing to maintain the AT&T Wireless network, leaving customers who don’t upgrade to the Cingular network in the lurch.” As a result of this conduct, Complainants initiated the class action against AT&T Wireless in July 2006, requesting a declaratory judgment that an arbitration provision contained in their contracts with AT&T was unconscionable and therefore unenforceable.

Judge Ricardo Martinez found that Washington State law “has a strong public policy of refusing to enforce exculpatory class action bans,” and prohibiting the right of a plaintiff to initiate a class action suit violates the state’s consumer protection laws. Further, the Court noted that “the Washington Supreme Court has recently held that a class action waiver provision in an arbitration agreement is substantively unconscionable.” Accordingly, while there is no absolute ban on a class action waiver provision, where, as here, the damages are relatively small (generally between $4.99 and $175) and the “the cost of pursuit outweighs the potential amount of recovery,” the clause can be found unconscionable.

As a result, the Court determined that the

class waiver provisions in the instant case are unconscionable. Defendants are effectively exculpated from any liability as a result of the provisions contained in their [Wireless Service Agreements]. This conduct contravenes Washington’s fundamental public policy favoring the availability of class actions as a mechanism for enforcing a consumer’s rights.

While this decision has no direct bearing on New York wireless consumers and PULP is unaware of any New York decisions regarding arbitration clauses in telecommunications contracts, mandatory arbitration clauses in credit agreements have been invalidated in New York State as being unconscionable.

Lou Manuta