AT&T Arbitration Clause Ruled Unconscionable

Tech.Luver writes to tell us the Consumerist is reporting that a small clause in AT&T contracts has been ruled "unconscionable" by the 9th circuit court of appeals. The clause in question stated that if you use AT&T service you surrender your right to class action lawsuits and instead have to participate in mandatory binding arbitration.

Comments

all fine print

[seanadams.com]

"unconscionable" basically means that no person of sound mind could have been expected to accept the contract at the time the contract was signed.

Seem to me like that should apply to all EULAS, click-through terms of service, notice of terms after the fact, etc. No person should be expected to wade through such a contract for such trifling matters as purchasing a telephone, installing some software, etc.

Re:all fine print

[JoshHeitzman]

"And how much do you want to bet they just ruled that it was unconsciable for the person to waive their rights to a CLASS-action lawsuit in place of arbitration, rather than individual arbitration?" It doesn't appear to be even that much. At the end it says "In sum, we hold that Cingular's class arbitration waiver is unconscionable under California law", so it only seems to go as far as ruling unconscionable the waiver of class arbitration (and even then only when it is done through an adhesion contract and only where the amounts in dispute are small and numerous customers of the company have such small amounts in dispute). If the contract had been written better it looks like the part waiving class arbitration could have been voided without also voiding the waiver of class action lawsuits, but it wasn't written in such a way.

Re:all fine print

[bwt]

The ninth circuit court's jurisdiction is roughly 20% of the US population. The only reason they have more overturned decisions than any of the other circuit courts is because they try way more cases than any other circuit court.

It certainly is true they have more cases, but everybody understands that so they use this fascinating trick called "percentage" when comparing. The Supreme Court decides which cases they want to review, and of these, the 9th Circuit's cases are overturned 30% of the time, which is triple the rate of the 5th Circuit, 6th Circuit, and State Courts who tie for 2nd-4th with 10%. See this citation analyzing the 2003 SCOTUS term. In 2003, the 9th Circuit was responsible for 43%, (10 of 23) of the High Court's unanimous reversals. This pattern is a long term one and is not confined to 2003. In 1997, 27 of the circuit's 28 rulings appealed to the U.S. Supreme Court were reversed, two-thirds of those by a unanimous vote.

The reason for the high overturn rate is that the 9th circuit has a few very liberal judges who are not afraid to take maverick viewpoints that differ from those of other Circuits. For example, 9th Circuit judge Stephan Reinhart is the most overturned active judge. In the decade from the beginning of October 1994 through the end of September 2004, the Supreme Court reversed decisions that Judge Reinhardt authored or joined 53 times (26 unanimously), accounting for more than one-third of the Ninth Circuit cases reversed during that period.

Re:Article or link?

[Constantine XVI]

http://consumerist.com/consumer/victories/cingular s-class-arbitration-waiver-ruled-unconscionable-by -9th-circuit-court-of-appeals-290806.php
It was edited out of the Firehose entry (by mistake, I assume)

Re:Article or link?

[gigne]

The link in the original firehose submission is this:

http://consumerist.com/consumer/victories/cingular s-class-arbitration-waiver-ruled-unconscionable-by -9th-circuit-court-of-appeals-290806.php

Though I agree it is poor form not including one in the article.

Comcast is doing this too

[SCHecklerX]

I just got the same notice in my most recent Comcast bill.

...and in Canada

[Hemogoblin]

Michael Geist recently wrote on his website about this topic and how it applies in Canada. Unfortunately, the Supreme Court of Canada concluded that the arbitration clause was enforceable and that the use of a hyperlink was sufficient.

Unconscienable == invalid & unenforceable

[redelm]

Now the 9th has a hard-earned reputation as avant-garde [nutjobs]. This is an astounding ruling. The binding arbitartion clause is pure boilerplate found in many, many contracts. For the 9th to toss it out changes many contracts.

Perhaps this is in connection with unequal power consumer level contracts. But then I would suggest that some PUC isn't doing it's job. And if it isn't because the Legislature hasn't seen fit to include DSL as a regulated service, then I'm not sure the courts can or should interfere.

Please note I'm not criticisning the 9th's decision. They might well be correct: it is the height of absurdity for a court to respect any contested provisions to bypass it. Courts are to resolve disputes fairly. Provisions otherwise are contemptuous.

Re:Unconscienable == invalid & unenforceable

[clearreality]

The 9th Circuit's decision on this one seems to be well-reasoned. You can read the decision here.(PDF)

They basically state that the contact in question for this type of case must be a contract of adhesion, and they clearly define what that means. A contract of adhesion is defined as a contract between a party of greater bargaining power and a party of weaker power (ie, AT&T and a wireless subscriber), and the contract must be standardized for use with all equivalent parties of weaker power (ie, all wireless subscribers), and the presentation of that contract must be "take it or leave it" (ie, no chance to negotiate).

It is good to note that the ability to walk away from a contract does not change that the contract is a contract of adhesion, even if you accept that contract instead of walking away.

The court also adequately addresses the issue of marketplace alternatives, specifically stating that even if meaningful alternative services exist (ie, Verizon, Sprint, T-Mobile, etc), that this does not change the fact that the contract may be procedurally unconsionable (a "contract of adhesion" is also stated as being automatically procedurally unconsionable to some degree).

Note, for a contract or clause of a contract to be unenforceable, it has to be both substantively and procedurally unconsionable to enough of a degree as to be ruled unenforceable. Please read the court's decision and other documents to learn more about legal unconsionability.

On the issue of arbitration, the court seems to treat arbitration with respect, and cites several cases where arbitration was used and also lists some favorable reasons for people and companies to use arbitration. This is clearly not a case of the court dismissing arbitration -- this is a case where the members of the class who want to sue AT&T would be at a severe disadvantage if they were required to use individual arbitration. Note, AT&T stated that they did not want to use class arbitration to resolve the issue, they specifically wanted individual arbitration. The court actually presents opinions supporting class arbitration at one point in the decision.

This decision makes sense, and shows that terms that are included in contracts of adhesion are vulnerable to being ruled unenforceable. This is good news from the consumer standpoint, and does not weaken arbitration or consumer's rights in any way I can see.

I am not a lawyer. I just RTFA.

Re:Unconscienable == invalid & unenforceable

[mrbrown1602]

For the 9th to toss it out changes many contracts.

Not really. Courts have thrown out arbitration clauses before, simply because they're weighted too much in favor of one corporation with a lot of power, versus an individual. One case in particular comes to mind... Hooters of America v. Phillips.

First Sale Doctrine & Software

[Elemenope]

Well, where software is concerned, EULAs are moot. You see the EULA after you make the purchase and open the package. Open the package, the store will refuse to accept it. Your right of first sale (it's a commodity good, NOT a work for hire) allows you to use it for its intended purpose without restriction. You are still of course bound by patents and copyrights, but not to use the package for its advertised purpose, or even to resell it to someone else when you're finished with it.

Not that I disagree that's how it ought to be, but last I checked/heard/read the US Appeals courts were still thoroughly confused on the point of whether the First Sale Doctrine applies to software licensed for purchase. Any lawyers in the house who know one way or the other? Have there been any definitive rulings, esp. Supreme court rulings on the issue?

Precedented

[Anonymous Coward]

Reading the court's opinion, the ruling follows several other precedents. In short, Cingular attempted to prevent the filing of class actions by mandating all disputes be settled by individual arbitrations. The court ruled that this was essentially an unfair agreement in this case. Because the amounts being claimed were small--these are cell phone fees--eliminating class actions shields Cingular from responsibility for its own mistakes. It's unbalanced to force each affected individual to present their own suit, when the problem is that Cingular mislead the group.

Finally, the Federal Arbitration Act doesn't preempt California law because the flaw is a broad contractual one--it unfairly benefits one party. The Act prevents states from limiting arbitration specifically, but subjects arbitration clauses to the state's contract laws.

Re:9th Circuit Reversals

[clearreality]

Your statistics are correct, however there is some additional information that should be considered.

The 9th Circuit Court processed (the courts say "terminated") 13,424 cases in 2006. That's right, over thirteen thousand. Out of thirteen thousand, 22 cases were heard by the Supreme Court, and 19 were reversed. That is not a bad record.

Data here (choose 9th Circuit) and here (choose 2006).

Also, note that the appeals process is designed to overturn incorrect decisions. For an example of this, see the statistics at this page. Note the percentages of cases that are reversed or vacated for all courts.

The percentage of overturned cases should be higher for the Supreme Court, as they get to decide whether to review cases or not. This means they will mainly choose cases where they think they need to correct a bad decision, clarify a law, etc. So, having a high percentage of cases overturned by the Supreme Court means that the Supreme Court is doing its job well, not that the other courts are doing a bad job.

It's a California law issue

[Animats]

The key to this is that California law applies. "Under California law, a contract provision is unenforceable due to unconscionability only if it is both procedurally and substantively unconscionable." The "Discover Bank test" applies: "Under this three-part inquiry, courts are required to determine: (1) whether the agreement is " 'a consumer contract of adhesion' " drafted by a party that has superior bargaining power; (2) whether the agreement occurs " 'in a setting in which disputes between the contracting parties predictably involve small amounts of damages' "; and (3) whether " 'it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.' (quoting Discover Bank, 36 Cal. 4th at 162-63)"

Arbitration clauses aren't being disallowed generally. But when, as the court puts it, "the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money", the courts can allow class action suits.

This is a routine decision based on California law; there are about a half dozen cases so far based on Discover Bank. Read the decision.

Re:Old news

[Internet Ronin]

Hey, as a law student, I hate to break it to you, but the only contracts that are enforceable are the ones YOU agree to. I know it's en vogue to blame the evil faceless corporation for the world's ills, but guess what? The blind masses who think they can forfeit their rights, with NO problem, in order to gain luxuries are a complicit accomplice. Contracts have to be signed by TWO parties.

Re:Old news

[Zatchmort]

Contracts can't override laws, and there are indeed many such bluffs. However, that's not the same as saying you can't give up your rights. IANAL, but I have studied contracts. The standard statement "by participating in this program, you agree not to sue us" is called an exculpatory clause, and it IS binding under most circumstances. You're giving up the right to sue them for negligence, which otherwise you would have.

Re:Article or link?

[Razed By TV]

It was edited out of the Firehose entry

Wait a second. Are you saying that the editors actually did something? I would say they undid something.

A few other examples

[einhverfr]

IANAL either, but there are all sorts of other contracts which may do things like prevent or compel speech (indemnification clauses, or example),

"YOu agree not to sue us" certainly pushes it. "NO WARRANTY EXPRESSED OR IMPLIED" is probably less of a problem in most jurisdictions.

A lot of this is contextual. Not all rights can be waived in contract, but I would say that most rights could be.