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Arbitration Class Action Defense Cases-Lowden v. T-Mobile: Ninth Circuit Affirms District Court Denial Of Defense Motion To Compel Arbitration Of Class Action Finding Class Action Waiver In Arbitration Agreements Unconscionable And Unenforceable

Class Action Waiver Unconscionable Under Washington State Law and Federal Arbitration Act (FAA) so District Court Properly Denied Defense Motion to Dismiss Class Action Complaint and Order Individual Claims to Arbitration Ninth Circuit Holds

Plaintiffs filed a class action in Washington state court against their cellular telephone service provider, T-Mobile, “alleging that the service provider had improperly charged them for certain fees beyond the advertised price of service, charged them for calls during a billing period other than that in which the calls were made, and charged them for roaming and other services that should have been free.” Lowden v. T-Mobile USA, Inc., 512 F. 3d 1213, 1215 (9th Cir. 2008). The service agreements underlying the class action plaintiffs’ claims contained mandatory arbitration provisions that barred class action litigation, id. Defense attorneys removed the class action to federal court, and then moved the federal court to compel arbitration of the claims on an individual rather than class action basis. Id., at 1214. The district court denied the motion, concluding that the arbitration clauses were unenforceable because the class action waivers and the limitation on punitive damages rendered them substantively unconscionable, id., at 1217. Defense attorneys appealed and the Ninth Circuit affirmed.

The service agreements signed by the class action plaintiffs stated, directly above the signature line, that any disputes would be submitted to mandatory arbitration. Lowden, at 1215-16. The specific language in the two service agreements underlying the class action complaint differed slightly, but the differences did not impact the district court’s decision: each arbitration clause precluded class action litigation. Id. In ruling on T-Mobile’s motion to compel arbitration, the district court concluded that the arbitration provisions were not procedurally unconscionable, but “held that the prohibition on class relief and the limitation on punitive damages, found in both agreements, were each substantively unconscionable.” id., at 1217. The Ninth Circuit defined the issues on appeal as whether T-Mobile’s arbitration provisions “are enforceable under Washington state law and, if not, whether the state law is preempted by the Federal Arbitration Act (‘FAA’), 9 U.S.C. §§ 1-16.” Lowden, at 1214. It concluded that, in light of the Washington State’s Supreme Court opinion in Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007), “T-Mobile’s arbitration provision is substantively unconscionable and unenforceable under Washington state law,” and that the FAA did not preempt Washington state law. Lowden, at 1214-15.

We do not belabor the first point on appeal, as the Ninth Circuit simply relied on Scott in determining that T-Mobile’s arbitration agreements are unconscionable and unenforceable. See Lowden, at 1217-19. (Scott held that Cingular’s class action waiver clause in its arbitration agreement was substantively unconscionable. See Scott, 161 P.3d at 1007-08.) The Circuit Court concluded at page 1219, “T-Mobile has expressly stated that it does not consent to class action arbitration and that, as a result, if we deem the class action waiver clause unconscionable under Washington law, the entire arbitration provision should be rendered unenforceable. Having determined that the (nonseverable) class action waiver is invalid under Washington law, we hold that T-Mobile’s arbitration agreement is unenforceable under Washington law.”

The Ninth Circuit then turned to the issue of whether the FAA preempts Washington law from invalidating T-Mobile’s class action waiver as unconscionable. Lowden, at 1219. Preliminarily, the Circuit Court noted that the FAA expressly provides that arbitration agreements “‘shall be valid, irrevocable, and unenforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’” Id. (citing 9 U.S.C. § 2). The U.S. Supreme Court has held that this means the FAA does not preclude invalidating an arbitration clause under “a principle that applies to contract generally.” Id. (citing Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996)). The Ninth Circuit rejected defense arguments that Washington law invalidating class action waivers as unconscionable “is not a contractual rule of general applicability under the FAA,” relying on its prior opinion in Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d 976 (9th Cir. 2007), discussing a similar class action waiver under California law, id. (A discussion of Shroyer and a copy of the opinion may be found here.) In so doing, the Circuit Court stressed that California “was not holding that all class action waivers are necessarily unconscionable, but rather only those in certain circumstances.” Lowden, at 1221.

The Ninth Circuit’s opinion is unclear as to whether it interprets Washington law as prohibiting class action waivers under any circumstances. See Lowden, at 1221-22. The issue, of course, is whether such a blanket prohibition would invalidate an arbitration provision on a basis that applies only to class actions, rather than to contracts generally. The Ninth Circuit opinion and its discussion of Scott suggests that Washington intended such a blanket bar and that the Ninth Circuit found no conflict between such a bar and the FAA, but again the opinion is far from clear on this point. See id., at 1221-22.

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