The Washington Supreme Court of Washington held that a wireless service provider's arbitration agreement was unconscionable by virtue of its class waiver, confidentiality requirement, abbreviated statute of limitations, and limitation on fee-shifting.

In McKee v. AT&T Corp., No. 81006-1, 2008 WL 3932188 (Wash. Aug. 28, 2008), McKee signed up for AT&T phone service, and weeks later, AT&T mailed him the service contract, which contained an arbitration agreement. The arbitration agreement prohibited class actions, required that all arbitrations be kept confidential, provided that any claim must be brought within two years, and limited McKee's right to recover punitive damages and attorney fees.

McKee later brought a class action lawsuit against AT&T, alleging that AT&T wrongfully charged city utility surcharges and usurious late fees. AT&T moved to compel arbitration, but the trial court held that the agreement was unconscionable. AT&T appealed.

On appeal, the Court first had to determine if New York or Washington law governed the agreement. The agreement contained a New York choice-of-law provision, but the Court held that Washington law governed the agreement because New York law violated a fundamental public policy of Washington. Specifically, it found that New York law, which permits waiver of class-based relief, conflicts with Washington's fundamental public policy to protect consumers through the use of class action claims to pursue small-dollar damages under the Washington State Consumer Protection Act (WSCPA). Accordingly, the Court held that Washington law governed the contract.

AT&T argued that the Federal Arbitration Act (FAA) preempts the WSCPA. The Court disagreed, holding that the FAA does not require enforcement of unconscionable contract provisions, so the fact that the WSCPA renders certain contract provisions unconscionable does not mean that it conflicts with the FAA.

The Court then determined that the arbitration agreement was unconscionable. First, the agreement contained a class action waiver, which is unconscionable under Washington law when it effectively exculpates a business for widespread misconduct. The Court decided that was the case here, as McKee's claim was individually worth less than $2 per month, but in the aggregate and over time, AT&T was enriched greatly by its misconduct. Thus, the class action waiver was unconscionable.

Next, the Court held that the confidentiality provision was unconscionable because it served no purpose other than to tilt the scales in favor of AT&T by concealing consumer fraud. Furthermore, the Court held that the two-year limitations period was unconscionable because it shortened the WSCPA's four-year statute of limitations period.

Finally, the Court held that the agreement unconscionably limited damages and attorney fees, as it allowed AT&T to recover attorney fees but prevented consumers from recovering attorney fees or punitive damages unless expressly authorized by statute. The WSCPA provides attorney fees for consumers who successfully challenge unfair acts and practices; thus, the Court held that the provision limiting attorney fees in the agreement was unconscionable.

AT&T argued that the unconscionable provisions of the arbitration agreement should be severed so that the matter could still be sent to arbitration. The Court rejected AT&T's argument, holding that the unconscionable provisions so permeated the entire agreement that severance would essentially require the Court to rewrite the agreement.

In conclusion, the Court explained that "[e]ach provision discussed above magnifies the exculpatory effect of the arbitration agreement. These unconscionable provisions operate in concert to eliminate any realistic possibility of relief for consumers with small claims such as McKee's." As a result, the Court affirmed the trial court's denial of the motion to compel arbitration.