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By a 6-3 majority, the Washington Supreme Court held that a class action waiver was substantively unconscionable – thus rendering the arbitration agreement unenforceable – because the waiver allegedly functioned as an exculpatory clause by impeding the pursuit of minor claims. In reaching this holding, the Court was unswayed by the remedial impact of an attorney fees provision in the agreement because the attorney fees provision was expressly limited to consumers who prevailed in full. Accordingly, as the Court noted, a consumer "could recover 99 percent of a claim and still not be awarded any attorney fees."
In Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007), Scott brought a class action against Cingular, his wireless service provider, alleging that Cingular violated Washington's Consumer Protection Act (CPA) by overcharging its customers between $1 and $40 per month.
Cingular moved to compel arbitration in accordance with the service contract. In opposing the motion, Scott argued that the arbitration agreement was unconscionable because it contained a class action waiver that barred class-wide proceedings. The trial court granted the motion.
The Washington Supreme Court (the Court) granted review. In most jurisdictions, both substantive and procedural unconscionability are necessary to render a contract unenforceable, but under Washington law, substantive unconscionability, standing alone, is sufficient to render a contract unenforceable. Accordingly, the Court focused solely on whether the class action waiver was substantively unconscionable.
The Court concluded that the class action waiver was substantively unconscionable under two seemingly distinct theories. First, the Court held that the waiver was substantively unconscionable on the ground that it undermined the public policy of the CPA by "dramatically decreasing" the possibility that Cingular customers would be able to act as private attorneys general and bring meritorious suits on minor claims.
Second, apart from any public policy embodied by the CPA, the Court held that the waiver was substantively unconscionable because it effectively exculpated Cingular from liability for those claims allegedly too small to warrant arbitration on an individual basis.
Since no party argued for severability, the unconscionability of the class action waiver rendered the arbitration agreement unenforceable. Accordingly, the Court reversed the lower court order compelling arbitration.
There were three dissenting justices. They reasoned that any policy against class action waivers should come from the legislature rather than the courts. The dissenting justices also pointed out that the arbitration agreement at issue was "consumer friendly" because it required Cingular to pay the costs of arbitration and allowed those consumers who prevail in full to recover their attorney fees.
As the dissenting justices observed, the majority opinion was premised on the notion that it would be "essentially impossible" for Cingular customers with minor claims to obtain legal counsel. In this regard, the majority opinion overlooks a key provision of the CPA.
Specifically, under the express terms of the CPA, claimants can recover their attorney fees. See Wash. Rev. Code Ann. § 19.86.090. More importantly, the size of the claim does not limit the amount of the attorney fee award. See, e.g., Connelly v. Puget Sound Collections, Inc., 553 P.2d 1354 (Wash. Ct. App. 1976) (awarding $1,600 in attorney fees to a CPA claimant whose net recovery was $24.38); see also Keyes v. Bollinger, 640 P.2d 1077, 1084 (Wash. Ct. App. 1982) (noting that a CPA attorney fee award "is not unreasonable merely because it exceeds the damages awarded").
In fact, under the CPA, the amount of an attorney fee award is determined using a "lodestar" approach whereby the presumptive award is the number of hours reasonably expended multiplied by a reasonable hourly rate. Under this approach, "the amount of the potential recovery" is merely one factor that may be considered in assessing whether the attorney's usual billing rate is a reasonable hourly rate. See Bowers v. Transamerica Title Ins. Co., 675 P.2d 193, 203 (Wash. 1983). Moreover, if the attorney fee is contingent on success, Bowers permits an upward adjustment of the attorney fee award.
In light of the "lodestar" approach described above, the CPA's fee-shifting provision gives an attorney every incentive to represent a CPA claimant in an individual proceeding where the prospective recovery is relatively small. Nevertheless, the majority opinion makes no reference whatsoever to the CPA's attorney fees provision, instead focusing on the contractual attorney fee provision which was a separate and supplemental basis for Scott to recover his attorney fees.
A few weeks prior to the Scott decision, a federal court in Washington upheld a class action waiver under Texas law, reasoning that the application of Texas law would not violate a fundamental public policy of Washington. See Carideo v. Dell, Inc., No. C-06-1772, 2007 WL 1753511 (W.D. Wash. June 18, 2007). As Carideo indicates, the enforceability of a class action waiver sometimes depends on the governing law. See Homa v. Am. Express Co., No. 06-2985, 2007 WL 1585168 (D.N.J. May 31, 2007) (upholding class waiver under Utah law); Omstead v. Dell, Inc., No. C 06-6293 PJH, 2007 WL 486724 (N.D. Cal. Feb. 13, 2007) (upholding class waiver under Texas law); MBNA Am. Bank, N.A. v. Newman, No. B190956, 2007 WL 882296 (Cal. Ct. App. Mar. 26, 2007) (upholding class waiver under Delaware law).
Carideo also suggests that Washington courts will continue to honor choice-of-law provisions in determining the validity of class action waivers because, as the court noted in that case, unconscionability is a case-by-case determination which should not be misconstrued as the embodiment of a fundamental public policy.
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