AT&T Can’t Force Arbitration in California Customer Disputes, 9th Circuit Rules
A federal appeals court found that an arbitration clause in AT&T wireless contracts is unenforceable under California law. The arbitration clause requires customers with disputes to seek arbitration, and bars class actions. In an order Tuesday by a three-judge panel, the 9th U.S. Circuit Court of Appeals in San Francisco upheld a district court decision denying an AT&T motion to compel arbitration in a class- action lawsuit. The lawsuit in the lower court challenged the company’s practice of assessing taxes for cellphones based on their retail prices even when they come “free” with a contract.
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AT&T disagrees with the court’s conclusions, and is “studying this ruling and considering our options,” a company spokesman said. “We continue to believe a customer is better off pursuing arbitration under our arbitration clause, rather than pursuing a class action. Arbitration is typically a fast, cost-effective and pro-consumer way to address disputes. Our arbitration agreement is among the most consumer-friendly in the nation, and has been shown to be very consumer-friendly in other cases.”
The 9th Circuit said AT&T contracts’ class-action waiver is unconscionable under a three-part test established in Discover Bank v. California Supreme Court. That’s because the lawsuit involved “predictably small amounts of damages,” customers alleging that the defendant “carried out a scheme deliberately to cheat large numbers of consumers out of small sums of money,” and a standardized AT&T contract that doesn’t let customers negotiate terms, wrote Judge Carlos Bea on behalf of himself and Mary Schroeder and Stephen Reinhardt.
A “premium payment” provision introduced by AT&T in late 2006 doesn’t make the class-action waiver more palatable, the court said. The provision requires AT&T to pay a customer $7,500 if the arbitrator issues the customer an award higher than the company’s last written settlement offer before an arbitrator is selected. AT&T argued the possible award gave customers sufficient incentive to seek arbitration, but the 9th Circuit disagreed because the disputed amount in the lawsuit was only $30.22. If the customer filed for arbitration, “predictably, AT&T will simply pay the face value of the claim … 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.”
“As a result, aggrieved customers will predictably not file claims … thereby ‘greatly reduc[ing] the aggregate liability’ AT&T faces for allegedly mulcting small sums of money from many consumers,” the court ruled. “AT&T’s class action waiver is in effect an exculpatory clause, hence substantively unconscionable.”
The 9th Circuit also rejected an AT&T argument that the Federal Arbitration Act preempts California’s unconscionability law. The court cited a previous 9th Circuit case, Shroyer v. New Cingular Wireless, which said the Act “does not bar federal or state courts from applying generally applicable state contract law principles and refusing to enforce an unconscionable class action waiver in an arbitration clause.”