Supreme Court: T-Mobile USA’s ‘Free Phone’ Lawsuit Can Move Forward

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The Supreme Court let stand lower court rulings that held federal arbitration law does not pre-empt class-action litigation against T-Mobile USA Inc., an action that divided the wireless industry and now paves the way for three federal lawsuits to move forward in California against the operator.

T-Mobile USA had asked the high court to review a ruling by the 9th U.S. Circuit Court of Appeals. That court ruled in favor of class-action plaintiffs, who alleged the Bellevue, Wash.-based wireless carrier violated state consumer protection law by assessing a sales tax on the full retail price of a cellphone advertised as free or significantly discounted. When the dispute first arose between the parties, T-Mobile USA – the U.S. unit of German giant Deutsche Telekom AG – sought to compel arbitration. Most mobile-phone service contracts mandatory arbitration clauses. The plaintiffs subsequently sued, winning first in U.S. district court and later in federal appeals court in San Francisco.

A similar class-action lawsuit was filed against AT&T Mobility, which lost in federal court and challenged the ruling in the 9th Circuit before eventually dropping the appeal. Indeed, AT&T Mobility broke with the mobile industry – which urged the high court to take T-Mobile USA Inc. v Jennifer L. Laster et al. – by urging the Supreme Court to deny T-Mobile USA’s request for review. AT&T Mobility said a review would be premature in view of new, consumer-friendly agreements between the No. 1 wireless operator and its subscribers.

At the same time, AT&T Mobility did not voice support for the plaintiffs.

"To be sure, we agree with T-Mobile that the FAA [Federal Arbitration Act] precludes states from striking down class waivers so long as the arbitration provision does not affirmatively burden the consumer’s ability to obtain full redress," AT&T Mobility told the court. "We submit, however, the need for this court to intervene could be eliminated, or the issue could be more sharply focused, by awaiting the further evolution of both consumer arbitration provisions and the law governing their enforceability."

AT&T’s new arbitration

Indeed, given that some state and federal courts have refused to enforce arbitration clauses in cellular service contracts and thus legitimized class actions against wireless carriers, AT&T Mobility’s novel approach to arbitration could be emulated by other cellular operators.

AT&T Mobility said it adopted a new arbitration provision in December 2006. The company said the policy provides a more attractive and efficient avenue for dispute resolution that allows customers – among other things – to arbitrate non-frivolous claims for free; expressly recognizes the customer’s right to recover attorneys’ fees whenever a court awards such fees; provides for an award of double attorneys’ fees if the customer is awarded more than the amount of
AT&T Mobility’s last settlement offer; provides for a minimum award to the customer of at least $5,000 in the same circumstance; imposes no limitation on the arbitrator’s power to award punitive damages; does not require that the
arbitration be kept confidential; gives the customer complete discretion to decide whether arbitration shall be conducted in person, by telephone or on the papers; and specifies that arbitration will be conducted in the county of the customer’s billing address.

"If a court ever were to hold that ATTM’s 2006 arbitration provision nonetheless is unconscionable merely because it requires that arbitration be conducted on an individual basis (thereby precluding class actions in either arbitration or court), ATTM believes such an interpretation of state contract law would be pre-empted by the Federal Arbitration Act," AT&T Mobility said in a friend-of-the-court brief. "But thus far, the only court to address an unconscionability attack on this path-breaking arbitration provision has held that the provision is fully enforceable."

Step lightly, CTIA warns

In its Supreme Court brief, industry association CTIA warned the Supreme Court the 9th Circuit’s "decision will have a sweeping negative impact on the wireless industry and its customers.”

The Supreme Court’s decisions to affirm lower court rulings that enable class actions against T-Mobile USA to proceed come as the cellphone industry lobbies the Federal Communications Commission and Congress to craft a national regulatory framework for the wireless industry. But consumer and states groups appear unwilling to agree to any plan that repeals limited state powers allowed by a 1993 law.

"The cellphone companies had argued that the arbitration agreements they imposed on consumers should be enforced and that the many lawsuits brought against cellphone companies by angry consumers should be dismissed," said Harvey Rosenfield, founder of Consumer Watchdog (formerly the Foundation for Taxpayer & Consumer Rights). "The motive behind the wireless industry’s attempt to apply one-sided arbitration clauses to cellphone customers, and its move to
get the FCC to derail state lawsuits by way of regulation, is the same: to evade accountability in the courts to consumers who have been overcharged, received shoddy service or subject to other abuses."

Consumer Watchdog
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