Ninth Circuit: AT&T Wireless Can't Bar Class Action Suits

When you sign up for wireless telephone service and receive a "free" cell phone in exchange for a two-year contract, if you'd like to challenge the carrier's ability to collect sales tax from you on the "free" phone, can the carrier force you into arbitration and prevent you from seeking a class action suit? On October 27th, the federal Ninth Circuit Court of Appeals said no.

In Laster v. AT&T Mobility LLC (No. 08-56394), a couple signed a Wireless Service Agreement ("WSA") with AT&T Mobility in 2002 and received two cell phones without charge because they agreed to a two-year contract. However, AT&T charged them $30.22 in sales tax for the two phones calculated at both phones' full retail value. The WSA includes both an arbitration clause, which requires any disputes to be submitted to arbitration, and a class action waiver clause, which requires any dispute between the parties to be brought in an individual capacity. Subsequent to the signing of the agreement, AT&T revised the arbitration agreement to add a new premium payment clause. Under this change, AT&T will pay $7,500 if the arbitrator issues an award in favor of a California customer that is greater than AT&T's last written settlement offer made before the arbitrator was selected.

On March 2006, before the premium payment clause was added, the couple filed a complaint in the US District Court for the Southern District of California, alleging the practice of charging sales tax on a cell phone advertised as "free" was fraudulent. This case was consolidated with a related case in September 2006 and the District Court ruled that the class waiver provision of the arbitration agreement is unconscionable under California law and that California unconscionability law is not preempted by the Federal Arbitration Act. AT&T appealed.

The Court of Appeals found that under California law, the class action waiver provision is unconscionable because:

1. The WSA is a contract of adhesion because it "is a standardized contract imposed on the subscribing party without an opportunity to negotiate the terms;"
   
2. The dispute involves a small amount of damages; and
   
3. The petitioners alleged that AT&T had developed this scheme to cheat large numbers of customers out of small sums of money.
   

The Court went on to hold that even though AT&T eventually added the "premium payment" clause, the WSA is unconscionable. The Court wrote:

The $7,500 premium payment is available only if AT&T does not make a settlement offer to the aggrieved customer in a sum equal to or higher than is ultimately awarded in arbitration, and before an arbitrator is selected. This means that if a customer files for arbitration against AT&T, predictably, AT&T will simply pay the face value of the claim before the selection of an arbitrator to avoid potentially paying $7,500. Thus, the maximum gain to a customer for the hassle of arbitrating a $30.22 dispute is still just $30.22.

The Court also found that the Federal Arbitration Act does not preempt California unconscionability law.

PULP reported on a similar case in the federal District Court of Washington state back in May. In that case, the Court found that a class action waiver provision in a Cingular/AT&T Wireless arbitration agreement to be substantively unconscionable. The Court wrote:

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.

In New York State, PULP does not believe that the question has been addressed as to whether mandatory arbitration clauses in telecommunications contracts are permissible, but such clauses are prohibited in credit transactions .

Lou Manuta