Federal Appeals Court Victory for Consumers

Contact: Linda Sherry, Consumer Action, 415-777-9648
Jonathan Hutson, Trial Lawyers for Public Justice, 202-797-8600, ext. 246
F. Paul Bland, Jr., Trial Lawyers for Public Justice, 202-797-8600, ext. 223
James Sturdevant, The Sturdevant Law Firm 415-477-2410

Court Slams Long Distance Giant’s Arbitration Clause as Unconscionable and Unenforceable Under California Consumer Protection Law

Feb. 11, 2003 — Consumer Action's vigilance in advocating for consumers was rewarded today when the U.S. Court of Appeals for the Ninth Circuit affirmed that AT&T cannot force its existing customers to settle legal claims against the company out of court. In its ruling, the Court agreed with Consumer Action that a mandatory arbitration contract sent out to customers by AT&T in late 2001 under the guise of a change in terms notice is "unconscionable and unenforceable."

In July of 2001, Consumer Action and AT&T customer Darcy Ting led a California statewide class action lawsuit against AT&T for attempting to impose mandatory predispute arbitration to eliminate its long distance telephone customers’ right to their day in court and shield itself from liability. The lawsuit, Ting v. AT&T, is the first in the nation to challenge AT&T’s new mandatory arbitration provision. It was filed and certified as a class action on behalf of all AT&T long distance telephone customers in California.

The plaintiffs' legal team included F. Paul Bland and Michael J. Quirk of Trial Lawyers for Public Justice and Jim Sturdevant and Karen Hindin of The Sturdevant Law Firm in San Francisco.

The federal magistrate judge who presided at trial declared that AT&T’s mandatory arbitration and limitation of liability provisions are illegal, unconscionable, and unenforceable under California’s Consumer Legal Remedies Act and Unfair Competition Law, and permanently enjoined their enforcement in California.

AT&T appealed, arguing that it didn't matter whether the company complied with state contract and consumer protection laws because the Federal Communications Act and the Federal Arbitration Act preempted state laws.

The Ninth Circuit roundly rejected AT&T’s argument that the Federal Communications Act preempts either state contract laws or state consumer protection laws. The Court agreed with AT&T that the Federal Arbitration Act preempts California’s Consumer Legal Remedies Act, but held that California’s contract law was still sufficient to strike down nearly all of the terms in AT&T’s contract challenged by the plaintiffs.

"The Court of Appeals correctly held that federal communications laws do not provide long distance phone companies with any special exemption from complying with state consumer protection laws," said Linda Sherry, editorial director of Consumer Action. "Long distance phone customers will benefit enormously from California law’s strong protections against deceptive and abusive practices."

Affirming a significant legal victory for seven million of AT&T’s long distance customers in California, the Appeals Court struck down the long distance giant's arbitration clause, noting that it:

  • stripped consumers of the right to file or participate in a class action.
  • shielded AT&T from damages for willful misconduct under California consumer protection laws.
  • required consumers to pay expensive fees for arbitration.
  • contained a gag rule requiring consumers to keep secret any dispute they might have against AT&T.

The 40-page opinion (PDF file) concluded that the Court was not attempting to undermine the arbitration system, but that it found fault with the manner in which AT&T had tried to force arbitration upon consumers, the way in which AT&T wrote its clause in order to avoid liability for willful misconduct and the potential that consumers faced with vindicating their rights under AT&T’s arbitration proceedings would be responsible for high costs.

"The Court of Appeals made clear that corporations like AT&T cannot enforce abusive arbitration clauses that make it impossible for consumers to enforce their rights under consumer protection laws," said F. Paul Bland, Jr., staff attorney for Trial Lawyers for Public Justice (TLPJ), who argued the appeal on Oct. 7, 2002.

"AT&T cannot evade laws that protect consumers by sneaking in an unfair and one-sided, fine-print arbitration clause that most long distance customers won’t read or can’t understand," said Bland.

The Court of Appeals held that the provision of AT&T’s arbitration clause that banned class actions was unconscionable and manifestly one-sided, because it would make it harder for consumers to bring claims. It found that AT&T’s arbitration clause violated state consumer protection law because it would require consumers bringing claims against AT&T to pay costs that are greater than those they would have to pay if they had brought their claims in court.

The court also found that if AT&T succeeds in imposing a gag order, such secrecy would favor AT&T because the corporation would know what happened in other arbitrations but consumers would be unable to discover that information.

"AT&T not only tried to force its customers to take their claims to arbitration instead of court, it attempted to rig that forum to strip its customers of all meaningful rights and remedies under California law," said James Sturdevant, co-lead counsel for the plaintiffs. "The Court of Appeals made clear that courts can and must protect consumers from that kind of abuse."

Key briefs and the Ninth Circuit ruling in the Ting case are posted on TLPJ’s web site.

 

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