Wash.S.Ct.: Consumer-friendly ruling on preemption, arbitration

Washington’s supreme court struck the dispute resolution provisions of AT&T consumer contracts.

  Washington’s supreme court struck the dispute resolution provisions of AT&T consumer contracts, holding:

Washington consumer protection and contract law are not preempted by the Federal Communications Act of 1934 (FCA);
The Federal Arbitration Act (FAA) did not bar a finding of unconscionability;
Class action waiver, confidentiality, statute of limitations, and limits on attorneys fees are unconscionable in consumer contracts;

Unconscionable clauses were not separable from arbitration clause.

McKee v. AT&T Corp., --- P.3d ---, 2008 WL 3932188 (Wash. Aug. 26, 2008) (No. 81006-1).

 

          For more on arbitration agreements in consumer contracts and how to challenge them, see the handbook Consumer Arbitration Agreements: Enforceability and Other Topics, as well as numerous resources on the Public Justice website.

          Last year in Scott v. Cingular Wireless,161 P.3d 1000 (2007), the court held that class action waivers are unconscionable as applied to small but widespread consumer claims, and the FAA does not require their application. See the McKee opinion for cites to similar decisions by appellate courts in Illinois, Missouri, New Mexico, Oregon and Wisconsin and by the Ninth Circuit.

 

          Here, class plaintiffs claimed that AT&T violated Washington consumer law by charging them for a Wenatchee, WA utility tax when they didn’t live in Wenatchee. AT&T assesses charges by zip code, and Wenatchee’s zip code catches includes other towns as well. AT&T moved to compel arbitration. Customers did not sign any contract at the time they signed up for services, but were later sent a contract stating they agreed to it by continuing their service. The contract included a dispute resolution clause that barred class actions, mandated confidentiality, cut the statute of limitations in half, and limited punitive damages and attorneys fees.

 

         The court refused to apply AT&T’s choice of law provision, on the ground that (1) New York law permits class action waivers, (2) class action waivers are contrary to Washington’s strong public policy, and (3) Washington has a much stronger interest in the case.

           

          The court also rejected FCA preemption. Historically, the federal government established tariffs rates and conditions under the FCA that barred state law claims. But in 1996, Congress amended the FCA to eliminate the tariff system and create a more competitive market. Since then only one court has found preemption under the FCA: Compare Boomer v. AT&T Corp., 309 F.3d 404 (7th Cir. 2002), with Ting v. AT&T Corp., 319 F.3d 1126 (9th Cir. 2003). The court agreed with Ting that preemption was inappropriate under the post-deregulation FCA, because the law’s “market-based mechanism depends in part on state law” in place of a single federal standard. In a line that could be applied to many recent business preemption claims, the court said: “AT & T seems aghast that it may have to comply with the laws of 50 different states, but that is precisely what every other company that competes in a free, competitive, and open market must do.”

 

          Regarding the FAA, the court said that while the overall validity of contracts must be decided by arbitrators under Buckeye Check Cashing v. Cardegna, 546 U.S. 440 (2006), the validity of an arbitration clause itself must be decided by a court. Moreover, the FAA does not require that courts enforce arbitration clauses “that are essentially exculpatory clauses in disguise.” The various limitations on claims and remedies in AT&T’s contract “have absolutely nothing to do with resolving a dispute by arbitration. Courts will not be so easily deceived by the unilateral stripping away of protections, and remedies, merely because provisions are disguised as arbitration clauses.”

 

           As in Scott, the court held the class action waiver unconscionable because it involved small but widespread consumer claims that no attorney would be willing to take on an individual basis.

 

          The court also held the confidentiality clause unconscionable, because confidentiality “unreasonably favors repeat players such as AT&T,” violates strong state policy in favor of open and public administration of justice, and “may even help conceal consumer fraud.” In general, the court said, confidentiality clauses in consumer adhesion contracts are unconscionable.

 

          While parties may generally agree to shorten a statute of limitations, the court held that “such a limitation is harsh and one-sided when imposed on a consumer in a contract of adhesion for a basic consumer service such as long distance telephone service,” and is therefore unconscionable. Washington consumer law “would be meaningless” if such clauses routinely stripped consumers of remedies.

 

          The attorneys fees provision was also unconscionable because it purported to limit attorneys fees to those expressly authorized by statute, yet permitted AT&T to collect attorneys fees. This contradicted Washington’s public policy, because the state generally requires each part to pay their own cost but provides attorneys fees for plaintiffs in consumer claims.

 

          Finally, the court held that these unconscionable provisions could not be severed from the arbitration clause, because these provisions “pervade” the clause and severance “would essentially require us to rewrite the dispute resolution agreement.”

 

          In closing, the court emphasized that: “these provisions have nothing to do with arbitration. Arbitrators supervise class actions, conduct open hearings, apply appropriate statutes of limitations, and award compensatory and punitive damages, as well as attorney fees, where appropriate. Courts will not be easily deceived by attempts to unilaterally strip away consumer protections and remedies by efforts to cloak the waiver of important rights under an arbitration clause.”