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Arbitration Class Action Defense Cases–McKee v. AT&T: Washington State Court Holds Class Action Waiver Arbitration Clause Enforceable Affirming Trial Court Order Denying AT&T’s Motion To Compel Arbitration Of Class Action

Class Action Complaint Properly Kept in State Court Rather than Referred to Arbitration because Class Action Waiver Provision in Arbitration Clause Rendered Dispute Resolution Provision of Consumer Service Agreement Unenforceable as Unconscionable Washington State Court Holds

Plaintiff filed a class action against AT&T alleging that it wrongly charged him “city utility surcharges and usurious late fees”; specifically, the class action complaint alleged that plaintiff signed up with AT&T for long distance telephone service, and that his monthly bills “included a Wenatchee city utility tax surcharge, even though he lives outside the Wenatchee city limits.” McKee v. AT&T Corp., ___ P.3d ___ (Wash. August 28, 2008) [Slip Opn., at 1-2]. According to the class action, AT&T assessed taxes based on zip codes, and plaintiff’s zip code included not only people who lived in Wenatchee, but also people who lived outside the city limits. Plaintiff’s class action alleged that AT&T collects taxes from its customers “whether the customers owe the tax or not,” and imposes a late fee of 1.5% if the bill is not paid timely. Id., at 2. Defense attorneys removed the class action to federal court on the ground that it raised claims under federal law; plaintiff amended the class action complaint to omit any reference to federal law, and the district court remanded the class action back to state court. Id. Defense attorneys then moved to compel arbitration of the dispute pursuant to the dispute resolution provisions of their long distance service contract. Id., at 1. The dispute resolution provision required arbitration of all disputes and prohibited class actions; it also provides that claims must be brought within two years, and “limits a consumer’s right to collect punitive damages and attorney fees.” Id., at 4. The trial court denied the motion, finding the dispute resolution provision in AT&T’s Consumer Services Agreement to be unconscionable. Id., at 1. The Washington Supreme Court affirmed.

The Supreme Court explained that plaintiff “did not sign any agreement with AT&T” when he accepted AT&T as his long distance provider, and that he did not know whether he received a contract in the mail from AT&T. McKee, at 2-3. Defense attorneys submitted declarations that stated plaintiff received a “specific agreement” as part of his “fulfillment package,” and attached the agreement to their declarations, id., at 3. Plaintiff argued that the agreement was unconscionable: “He claimed he had no meaningful choice and the agreement was overly one-sided and harsh because it prohibited class actions, shortened the statute of limitations, prohibited punitive damages and attorney fees, required arbitration be kept secret, and required application of New York law.” Id., at 5. The trial court agreed with plaintiff: he ruled that the dispute resolution provision of the agreement was substantively unconscionable “because of the provisions prohibiting class actions, shortening the statute of limitations, limiting damages, requiring confidentiality, and” Id., at 5. A few months later, defense attorneys moved for reconsideration based on a new declaration that stated prior information provided under oath was in error because “AT&T had amended its agreement ‘in significant ways, including, for example, the removal of the two-year statute of limitations, the ability of the customer to determine whether the proceedings should be confidential, and specifically allowing consumers to obtain statutory relief—including damages and attorney’s fees—through the arbitration process.’” Id., at 6. The trial court denied the motion, and AT&T appealed. Id., at 7.

The Supreme Court began by analyzing the choice of law provision in the consumer services agreement, which provided that New York law govern any dispute. McKee, at 8. The Court concluded that Washington law applied to the dispute. Id., at 12. The Court also rejected AT&T’s argument that Washington law was preempted by either the Federal Communications Act of 1934 (FCA), see id., at 12-23, or the Federal Arbitration Act, see id., at 23-24. The Supreme Court then analyzed whether the mandatory arbitration/class action waiver provision of the agreement was enforceable. In this regard, the Court observed that under Washington state law, “Substantive unconscionability alone is sufficient to support a finding of unconscionability.” Id., at 24 (citation omitted). The Supreme Court held that the class action waiver rendered the contract substantively unconscionable. Id., at 25-26.

The Court additionally examined the effect of the confidentiality clause in the agreement and concluded that it too was substantively unconscionable, see McKee, at 27-28. The Court explained at page 27:

A confidentiality clause in a contract of adhesion is a one-sided provision designed to disadvantage claimants and may even help conceal consumer fraud. Confidentiality unreasonably favors repeat players such as AT&T. [Citations.] Secrecy conceals any patterns of illegal or abusive practices. It hampers plaintiffs in learning about potentially meritorious claims and serves no purpose other than to tilt the scales in favor of AT&T. [Citation.] It ensures that AT&T will “accumulate[] a wealth of knowledge” about arbitrators, legal issues, and tactics. [Citation.] Meanwhile, consumers are prevented from sharing discovery, fact patterns, or even work product, such as briefing, forcing them to reinvent the wheel in each and every claim, no matter how similar.

We do not here discuss the balance of the Court’s analysis, as the entire opinion is available below for interested readers. At bottom, the Supreme Court affirmed the trial court order refusing to compel arbitration and deny the availability of class action relief.

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