Arbitration Nation: Wireless Services Providers and Class Action Waivers

• Citation: Vol. 6 No. 1
• Publication year: 2010

Washington Journal of Law, Technology and Arts Volume 6, Issue 1 Summer 2010

Arbitration Nation: Wireless Services Providers and Class Action Waivers

Alexander J. Casey(fn*)

ABSTRACT

State consumer protection laws protect the public against unfair and deceptive trade practices. Plaintiffs seeking to invoke such consumer protection laws often bring class action suits to vindicate their rights. However, some jurisdictions have recently shown a willingness to enforce contract arbitration clauses that contain class action waivers. Such waivers prevent consumers from invoking class action status, and may also prevent them from enforcing relevant state consumer protection laws. Other courts, by contrast, have held that service contracts containing class action waivers violate relevant state consumer protection laws and are against public policy. Yet another group of courts facing the issue of class action waiver enforcement has held that relevant federal statutes preempt consumer claims brought under state law. This Article discusses this jurisdictional split on the issue of class action waivers and arbitration as they appear in telecommunication and wireless contracts. This Article also considers the implications of this jurisdictional divide for both businesses and wireless consumers.

Table of Contents

Introduction......................................................................................16

I. Anatomy of a Suit: Unfair and Deceptive Trade Practices Acts, Private Actors, and Consumer Protection................................18

II. Federal Preemption: The Federal Arbitration Act and Federal Communications Act as Potential Defenses.............................21

A. Federal Preemption Under the Federal Communications Act.......................................................................................22

III. Arbitration Clauses and "Unconscionability": The Central Issue............................................................................................24

IV. Decisions Favoring the Enforcement of Arbitration Contracts Due to an Absence of "Unconscionability"..............................27

V. Where to Go from Here: Implications and Observations.......29

Conclusion........................................................................................31

INTRODUCTION

Class action suits and consumer protection laws, like certain public agencies such as the Federal Trade Commission, have long defended the public from questionable business practices.(fn1) The Supreme Court has remarked that "the class action mechanism is [designed] to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action ... [and] solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor."(fn2) While there remains an ongoing dialogue about the exact role of class actions within the United States,(fn3) many contract drafters have sought to limit class actions as a means to resolve contract disputes. These limitations may be accomplished in several ways, including the use of arbitration clauses that contain a class action waiver provision.

Although class action waivers are widely used, such contract language has been the subject of heightened political scrutiny in recent months.(fn4) Courts are split as to the enforceability of arbitration clauses, especially when a class action waiver is located within that specific clause. There are two bases for the jurisdictional split on the issue of arbitration class action enforcement: federal preemption and substantive state law. First, some courts have held that federal law preempts state law on the issue of arbitration; as federal law favors the enforcement of such arbitration clauses, these courts apply the terms. Other courts have concluded, however, that where there is no issue of federal preemption, the terms of the arbitration clause and its class action waiver may violate state consumer protection laws and public policy. Thus, one split is on the issue of federal preemption and the second split arises over whether a substantive violation of state law has in fact taken place.

In addressing the jurisdictional divisions in telecommunication contracts, this Article briefly discusses the origin of class action consumer protection suits. This Article then addresses the arguments put forth on the issue of federal preemption, as well as the resulting division on the issue of the arbitration clause enforcement. This Article evaluates the leading cases favoring the nullification of class action waivers and the conflicting cases that actually reach the substantive legal questions under state law. Finally, this Article discusses the implications of the multifaceted jurisdictional division and its impact on other similarly positioned market actors and telecommunication consumers.

I. ANATOMY OF A SUIT: UNFAIR AND DECEPTIVE TRADE PRACTICES ACTS, PRIVATE ACTORS, AND CONSUMER PROTECTION

Consumer protection laws protect the public from unfair and deceptive business practices in various contexts, including telecommunication agreements between consumers and service providers.(fn5)Claims against telecommunication providers often arise under state consumer protection acts (CPAs), which are also commonly referred to as unfair and deceptive trade practices acts.(fn6) Plaintiffs will often assert their CPA rights in addition to their common law contractual rights because punitive damages, statutory damages, and attorney's fees may not be available at common law. Furthermore, a CPA cause of action contains fewer requisite elements than a pure breach-of-contract cause of action.(fn7)

Plaintiffs pursuing alleged breaches of contract or CPA violations often bring class action lawsuits. Private plaintiffs must, therefore, confront class action waiver language found in their wireless service provider contracts, which may include a specific class action waiver in their contract arbitration clauses. The arbitration clause may contain terms similar to the following:Any dispute arising out of this Agreement or relating to the Services and Equipment must be settled by arbitration by the American Arbitration Association. Each party will bear the cost of preparing and prosecuting its case ... The arbitrator has no power or authority to alter or modify these Terms and Conditions, including the foregoing Limitations of Liability section. All claims must be arbitrated individually, and there will be no consolidation or class treatment of any claivas. This provision is subject to the United States Arbitration Act.(fn8)

In challenging such waivers, plaintiffs have broadly asserted unconscionability-style claims under their relevant state CPA. In other words, plaintiffs asserting their statutory rights often employ language that mirrors the vernacular employed to discuss general contract principles. The concept of "unconscionability," as a term of art, bridges the statutory and common law claims and complicates analysis of the pertinent case law.(fn9)

For example, in Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, the court acknowledged that although plaintiff s challenge to the arbitration clause was "couched in terms of unconscionability, the ... arguments relate more to broader considerations of public policy than to the harshness of a particular bargain."(fn10) In Scott v. Cingular Wireless, the Washington State Supreme Court similarly observed that "the class action waiver clause ... is an unconscionable violation of [Washington State] policy to protect the public and foster fair and honest competition" as embodied in Washington's Consumer Protection Act.(fn11) Nota bene the formulation of the claims can implicate subsequent class certification proceedings and class representation.(fn12 )

In addition to private causes of action, state attorneys general may also enforce their relevant CPAs.(fn13) Nevertheless, private citizens functioning as "private attorneys general" also protect the public interest-although not without controversy-when pursuing statutory and common law rights.(fn14) This rise of private protection of the public interest is due, at least in part, to limited state resources.(fn15) Although a conflict of interest between private actors and the public good can occur, even in circumstances in which a private party seeks to enforce state law,(fn16) private actors remain critical to consumer protection.

Consumers challenging the enforceability of arbitration clauses often craft claims alleging, in essence, substantive and procedural unconscionability: (1) the contract "is a contract of adhesion that [(2)] restricts" plaintiff s means of seeking meaningful remedy, (3) because of the inclusion of a class action waiver, (4) that forces plaintiff to participate in cost prohibitive individual arbitration.(fn17) Courts that have found such a presentation of the issues persuasive have also, generally speaking, found no federal preemption of the relevant state CPA.(fn18)Nevertheless, federal preemption is a primary defense to these types of telecommunication class action waiver cases, and remains a central sub-issue for many jurisdictions; the jurisdictional split on this...