In affirming a district court order denying a mobile phone company's motion to compel arbitration, the Ninth Circuit Court of Appeals relied a on a recent decision by the Washington Supreme Court in holding that a class waiver rendered the arbitration agreement substantively unconscionable and therefore unenforceable under Washington law. The Court's decision in this case serves as a reminder that the principal consideration in these cases is attorney incentive, and as such, the enforceability of a class waiver may turn on whether the arbitration agreement satisfies attorney incentive within the parameters of one-on-one arbitration.

In Lowden v. T-Mobile USA, Inc., No. 06-35395, 2008 WL 170279 (9th Cir. Jan. 22, 2008), Lowden and another T-Mobile customer filed a lawsuit alleging that T-Mobile, their wireless service provider, had billed them for improper charges. In response, T-Mobile filed a motion to compel arbitration pursuant to an arbitration agreement in the customers' service contracts. The arbitration agreement contained a class waiver barring class-wide proceedings. In opposing the motion, the T-Mobile customers argued that the class waiver rendered the arbitration agreement unconscionable and therefore unenforceable. The district court denied the motion.

On appeal, the Court relied entirely on Scott v. Cingular Wireless, 161 P.3d 1000 (Wash. 2007) in holding that the class waiver rendered the arbitration agreement substantively unconscionable and therefore unenforceable under Washington law, which unlike most jurisdictions does not require a showing of procedural unconscionability. The Scott decision was based on the premise that a class waiver may operate as an exculpatory clause where the alleged damages are relatively small.

Having determined that Scott controlled the question of unconscionability, the Court turned to the issue of whether the Federal Arbitration Act (FAA) preempted this application of Washington law. Based largely on its decision in Shroyer v. New Cingular Wireless Services, Inc., 498 F.3d 976 (9th Cir. 2007), the Court found no preemption. Specifically, the Court reasoned that a finding of preemption would give special treatment, not equal treatment, to arbitration agreements because Washington's application of the unconscionability doctrine would also reach class waivers that applied to litigation rather than arbitration.

The Court's preemption analysis is flawed in several respects. First, in concluding its analysis, the Court stated that "[t]he FAA proscribes states from giving arbitration special treatment, whether it be positive or negative." This statement flies in the face of Supreme Court jurisprudence establishing that (1) the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements" and (2) "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (emphasis added).

Second, the Court's preemption analysis completely ignores a crucial distinction between class waivers in arbitration and class waivers in litigation. As the Supreme Court has stated, the purpose of a class action lawsuit is "to promote judicial economy by allowing for litigation of common questions of law and fact at one time." General Tel. Co. of Southwest v. Falcon, 457 U.S. 147, 161 (1982) (emphasis added). Class waivers in arbitration do not implicate the state's interest in judicial economy because arbitration is funded by the parties, not the taxpayers.

Third, when carried to its logical conclusion, the Court's preemption analysis leads to absurd results. For example, some jurisdictions have stringent requirements for the enforcement of a predispute jury trial waiver (e.g., knowing and voluntary assent). The FAA would clearly preempt a state law imposing these stringent requirements on the formation of arbitration agreements, but under the Court's reasoning in this case, those heightened requirements would be perfectly acceptable because waiver of the right in arbitration is on equal footing with waiver of the right in litigation.

Setting aside the Court's preemption analysis, this decision imparts valuable insight for parties who wish to preserve arbitration as a simplified and expeditious alternative to court. The overarching consideration in Scott, Lowden, and most other class waiver cases is whether an attorney has sufficient incentive to represent an individual claimant whose damages are relatively small. The arbitration agreement can satisfy this incentive and still preserve the simplicity of arbitration by giving prevailing claimants the right to recover "reasonable attorney fees" and defining that term in a manner which unhooks the quantum of attorney fees from the quantum of recovery.