Wednesday, February 12, 2003
Court Nullifies AT&T Arbitration Mandate for California Customers
By ROBERT GREENE, Associate Editor
A contract that AT&T tried to impose on its long-distance customers to keep them from reaching a jury cannot bind Californians because of state consumer protection laws here, the Ninth U.S. Court of Appeals ruled yesterday.
The court upheld most of a lower court ruling that nullified AT&T mandates that its customers give up the right to sue and instead submit to arbitration.
Also struck down as unconscionable under California consumer protection laws were clauses that barred class actions, compelled unhappy customers to pay half the arbitrator fees, eliminated liability for willful misconduct, and imposed a gag order on plaintiffs, even victorious ones.
Judge A. Wallace Tashima rejected AT&T’s assertion that the lower court ruling was “inherently hostile” to arbitration, which federal law encourages.
“If the district court indicated any hostility, it was not directed at arbitration, but at the manner in which it was forced upon consumers, the way in which AT&T avoided liability for willful misconduct, and the costs to consumers of vindicating their rights,” Tashima said. “The decision is hostile to the adhesive and oppressive nature of the [customer service agreement], not to the particular forum.”
The company later eliminated the willful misconduct language and rewrote the confidentiality provision.
A similar legal action in another circuit last year ended up with a ruling in AT&T’s favor.
AT&T spokeswoman Valerie Hasselbach said the ruling was “incorrect,” adding that the company was “disappointed with the court’s decision today.”
The company declined further comment.
AT&T’s new policy became effective in August 2001, after the New York-based company notified its customers by mail of the new agreement.
First, though, the long-distance telephone company conducted extensive market research to see how customers would react. The research showed that most customers would never read the contract, but instead throw away the document after reading a disclaimer advising that “service or billing will not change.”
The only way to opt out of the new contract was to call up and cancel AT&T service.
“AT&T did not change the substance of the letter as a result of its market research—indeed, internal AT&T documents indicate that the letter was specifically intended to make customers less alert to the details of the CSA,” Tashima noted.
But customer Darcy Ting read the whole notice and filed suit, along with Consumer Action, a nonprofit group.
U.S. Magistrate Judge Bernard Zimmerman of the Northern District of California ruled last year that AT&T’s agreement was “illegal and unconscionable” under California’s Consumer Legal Remedies Act.
AT&T argued that California laws are preempted not only by federal laws encouraging arbitration, but by the body of communications law that culminated in the Telecommunications Act of 1996—legislation replacing complex tariff regulations with competitive contracting between providers and customers.
Deferring to California consumer protection law forces telephone companies to improperly discriminate in favor of one state’s customers at the expense of all others, AT&T argued.
But the Ninth Circuit rejected the argument, as well as a Seventh Circuit ruling from last year that upheld a preemption defense to a state law challenge against AT&T’s contract in another state.
“By definition, the deregulated marketplace encompasses state laws of general applicability,” Tashima said. “Here, California’s unconscionability law is not unlike that of most other states, and even if it were, it does not make an otherwise competitive market non-competitive. The same can be said of the CLRA. State contract and consumer protection laws, including California’s CLRA and unconscionability law, form part of the competitive framework to which the [Federal Communications Commission] defers.”
The case is Ting v. AT&T, 02-15416.
Copyright 2003, Metropolitan News Company