Consumer Class Actions and Mass Torts : Class Action Lawyer & Attorney : J. Russell Jackson : Skadden Law Firm : Complex Class Actions : Consumer Class Actions & Mass Torts Law Blog

On deck for this morning is another case that brings home the message:  read those service contracts, folks, because they really can cut off your legal options.

In Minnick v. Clearwire US, LLC, 2010 WL 431879 (W.D. Wash. Feb. 05, 2010), customers sued the provider of wireless Internet and telephone service over the early termination fee ("ETF") contained in its contract.  The wireless service, plaintiffs alleged, was unreliable, slow and often non-existent.  But when they went to terminate service, the defendant pointed to the contract, which included an ETF of $220 less $5 per month of service the customer had since the beginning of the two year service contract.  

US District Judge Marsha Pechman -- who has previously ruled on Microsoft matters discussed in this blog -- granted the defendant's motion to dismiss the complaint.

She began her analysis by looking at what law would apply.  The contract provided that Washington or Delaware law would control.  Plaintiffs identified no difference in the laws, so the court did not ultimately make a choice of law determination.

The gist of plaintiffs' causes of action was that the ETF was an unconscionable penalty and should be disregarded.  The defendant convinced the court, however, that it was more analogous to an "alternative performance provision" that gave customers choices at the outset for how they would perform their obligations under the contract.

The court also analyzed UCC 2-302 -- even though this was a contract for services, not goods -- and observed that "unconscionability" is a defense to enforcement of a cause of action, but is not in itself a basis for restitutionary relief.

In analyzing the claim under Washington's Consumer Protection Act, the court noted that plaintiffs had two options:  either the actions had to have the capacity to deceive a substantial portion of the public, or they had to constitute a per se unfair trade practice.  The plaintiffs disclaimed a deception-based approach -- presumably since all of the contract terms were disclosed to customers before establishing service -- and instead relied on the "per se unlawful" prong of the CPA.  But all they could point to were common law precedents about "unlawful penalties" in contracts.  The Washington Supreme Court has held that the "per se unlawful" prong of the statute only applies to practices that the Legislature has declared unlawful.  Thus, common law precedents did not cut it and the CPA count was dismissed.

Plaintiffs also asserted an unjust enrichment count.  But "[u]nder Washington law, a plaintiff who is a party to a 'valid express contract is bound by the provisions of that contract' and may not bring a claim for unjust enrichment for issues arising under the contract's subject matter.  Id. at *5 (citation omitted).  Plaintiffs argued that they were merely engaging in "alternative pleading," but the court noted that the contract also had a severability provision, so even if the ETF provision were unenforceable, the remainder of the contract would survive and govern plaintiffs' payment obligations. 

The court also rejected plaintiffs' breach of contract count based on the allegedly lousy service they received from the defendant.  The contract provided that customer must notify the defendant in writing within 20 days if they disputed charges, and it limited damages to a credit for the customers' prorated monthly charges.  Even these were not available absent a written request.  Because the plaintiffs had not alleged compliance with these provisions, the court granted dismissal of the breach of contract count.

Finally, the court rejected the plaintiffs' count for false advertising under the CPA.  The court noted that no plaintiff identified statements that they relied upon, and therefore "they have not alleged a plausible basis to identify CPA causation."  Moreover, the court pointed to the FAQ section of the defendant's website, which "state[d] that the quality of service may vary depending on geography and modem placement."

Minnick is an important reminder that service contracts matter, and that they can be important tools to prevent class action litigation.

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I knew it was too good to be true.  A few months ago I posted about a decision from the Arkansas Supreme Court that affirmed dismissal of a deceptive trade practices claim because it fell within a safe harbor of regulatory approval.  At the time, I asked if there had been a sea-change in Arkansas class action jurisprudence.  Today, I'm sad to report that the answer is "no."

If there's one thing I learned growing up in Southwest Missouri, it's that everything is just a little bit different in Arkansas.  (Even my friends from Rogers, Arkansas concede as much.)  Apparently that principle goes double for class actions.

At a time when the Supreme Court, most federal Circuit Courts of Appeal, and many state supreme courts have held that due process requires a rigorous analysis of how a case is actually going to be tried before a class can be certified, Arkansas continues to instruct its trial courts to retreat from any sort of reality that touches upon the substantive elements of a claim.  See Rosenow v. Alltel Corp., 2010 WL 199247 (Ark.  Jan 21, 2010).  

In Rosenow, a customer sued his mobile phone service provider for damages allegedly resulting from the early termination fee in its standardized customer contract.  Plaintiff asserted on behalf of those who paid the early termination fee a putative statewide class action for violation of Arkansas' Deceptive Trade Practices Act and for common law unjust enrichment.

The trial court rejected class certification, holding that although a number of elements of Rule 23 had been met, the commonality, predominance and superiority requirements were not met.  In doing so, the trial court had relied upon the defense expert's testimony that determining whether the early termination fee (i.e. liquidated damages provision) was a reasonable approximation of the defendant's damages would be an individualized inquiry that would make the class unmanageable.

The Arkansas Supremes reversed, articulating a theory of class actions that is just a little bit different than anywhere else.  According to the Arkansas Supremes, so long as there are common issues, the class should be certified for trial of those issues even if it must later be bifurcated into a second phase of individual trials over things like damages, and in deciding whether the class action prerequisites are met, courts should not inquire into defenses to plaintiffs' claims, as that is an impermissible inquiry into the merits of the case:

In this case, Appellant alleges that the common wrong giving rise to this litigation is that the Appellees engaged in an unfair and deceptive business practice of imposing the early termination fee.  Appellant further asserts a laundry list of common questions of law and fact that stem from this alleged common wrong.  There must be a determination on these common issues.  The mere fact that individual issues and defenses may be raised regarding the recovery of individual members cannot defeat class certification where there are common questions concerning the defendant's alleged wrongdoing which must be resolved for all class members.  Moreover, an attempt to raise defenses at this stage is an attempt to delve into the merits of the case. . . .

* * *

This court has further said that if a case involves preliminary issues common to all class members, predominance is satisfied even if the court must subsequently decertify a class due to individualized damages.  However, if the preliminary issues are sufficiently individualized, then predominance is not satisfied and class certification is improper.  Indeed, a case that presents numerous individual issues regarding the defendants' conduct, causation, injury and damages will best be resolved on a case-by-case basis.  Stated another way, predominance does not fail simply because there are individual issues that may arise; the central question to be resolved by the circuit court is whether there are overarching issues that can be addressed before resolving individual issues. . . .

* * *

Here, by focusing on the merits of the case, the court noted that it might be necessary to conduct thousand[s] of mini-trials that would overwhelm its docket and thus concluded that the superiority requirement was not satisfied.  However, as we have explained, the circuit court's reasoning was based on an impermissible evaluation of the merits of this case.  Accordingly, the circuit court abused its discretion in finding that the requirement of superiority could not be satisfied.

Id. (citations omitted).  Because the defense expert's testimony addressed issues of how to prove damages and the reasonableness of the liquidated damages as compared to actual damages, the Arkansas Supremes concluded that it was concerned with the underlying merits of the case and the trial court had abused its discretion in refusing to strike such testimony.

Of course, Rule 23 is a procedural device that is not intended to change the substantive elements of underlying claims or defenses viz a viz any individual class member.  See, e.g., Compaq Computer Corp. v. LaPray, 135 S.W.3d 657 (Tex. 2004).  By wholly ignoring how the defendant will prove its defenses with respect to each class member in a classwide trial, the Arkansas approach effectively alters substantive elements of the defenses -- which is not what the drafters of Rule 23 intended.  Thankfully, Arkansas remains an outlier jurisdiction, and the trend toward rigorous analysis of how the case will actually be tried -- both the causes of action and the defenses -- remains the norm in class action jurisprudence.

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