Southern District of Texas Compels Arbitration in Class-Wide Suit against AT&T

Last week, the Southern District of Texas compelled arbitration in a class-wide lawsuit filed against AT&T Mobility, LLC.

In Johnson v. AT&T Mobility, LLC, No. 4:09-CV-4104, (S.D. Tex., December 21, 2010), an AT&T wireless customer, Johnson, filed a class action lawsuit on behalf of himself and all similarly situated AT&T customers in the State of Texas to recover state and local sales taxes paid on monthly fees for internet services included in AT&T wireless data plans. According to Johnson, despite that Texas Tax Code § 151.325 provides a statutory exemption from sales tax on the first $25 of such monthly charges, AT&T collected, and continues to collect, sales tax on its wireless data plans. Johnson also filed claims which alleged AT&T violated the Texas Deceptive Trade Practices Act (DTPA) and sued for breach of contract, injunctive relief and damages. After a Judicial Panel on Multidistrict Litigation declined to transfer the case for consolidated pretrial proceedings, AT&T filed a motion to compel arbitration pursuant to the terms included in its Terms of Service Agreement.

According to AT&T, the Terms of Service Agreement required that all disputes between the parties be arbitrated and that arbitration be conducted on an individual, rather than a class-wide, basis. Johnson did not dispute that an arbitration agreement existed, but argued instead that the agreement did not extend to the current dispute and, even if it did, the agreement was unenforceable.

The court first examined the Terms of Service Agreement in order to determine whether the arbitration agreement applied to the parties’ dispute.

The relevant agreement in ATTM’S Terms of Service reads: “AT&T and you agree to arbitrate all disputes and claims between us. This agreement to arbitrate is intended to be broadly interpreted. It includes, but is not limited to: claims arising out of or relating to any aspect of the relationship between us, whether based in contract tort, statute, fraud, misrepresentation or any other legal theory….” (Decl. of Richard J. Rives, Exs. 1-4, Doc. No. 18.) Thus, as the language encompasses “all disputes and claims” “arising out of” or “relating to” the agreement, the Fifth Circuit instructs that the agreement is a broad one capable of expansive reach.

Plaintiff’s allegation that ATTM wrongfully collected taxes from him and from other similarly situated consumers surely arises out of or relates to an aspect of the relationship between Plaintiff, a consumer, and ATTM, a retailer and collector of sales tax. Indeed, the agreement’s language does not limit binding arbitration to disputes regarding the provision of wireless services. It specifically provides that all disputes and claims arising out of or relating to any aspect of the relationship must be arbitrated. There is no exception for the sales tax collection portion of the transaction between consumers and ATTM. Thus, the Court finds that Plaintiff’s claims arising from the alleged wrongful collection of taxes by ATTM fall within the broad language contained in all four versions of the Terms of Service to which Plaintiff agreed.

The court next examined the enforceability of the arbitration agreement under Section 2 of the Federal Arbitration Act (FAA) stating “an agreement to arbitrate is valid under the FAA if it meets the requirements of the general contract law of the applicable state.” Johnson argued the arbitration agreement was both procedurally and substantively unconscionable under Texas law. According to the court, Johnson offered no evidence to support his contention that the agreement was procedurally unconscionable and no evidence existed in the record to support his claim.

Johnson argued the agreement was rendered substantively unconscionable by the Texas Supreme Court’s holding in In re Poly-America, L.P., 262 S.W. 3d 337, No. 04-1049 (Tex. Aug. 29, 2008). In declaring Poly-America inapposite, the court stated,

Plaintiff reads this holding broadly, essentially arguing that an agreement to waive any statutory right will not be enforced if it interferes with the deterrent purpose of a statutory scheme. The court, however, held that the elimination of the substantive rights and remedies available to plaintiffs under the Worker’s Compensation Act impermissibly undermined the goals of the statute such that the agreement was rendered substantively unconscionable. Notwithstanding that the [DTPA] expressly contemplates the availability of class-wide relief, Texas courts, as well as other courts interpreting Texas law, have consistently held that class actions are procedural devices, and do not implicate substantive rights.

The court next dismissed Johnson’s argument that the agreement was so one-sided as to render it substantively unconscionable despite that Johnson would be bound by an arbitrator’s adverse decision and AT&T could still pursue a claim against the state comptroller in the event of an unfavorable decision by stating,

The Court is persuaded, however, that the disparity in available review is not a function of the arbitration agreement itself, but of Texas state law, which provides ATTM recourse against the comptroller in the event it is ordered to issue a refund to Plaintiff.

Johnson also argued that the arbitration agreement was rendered unenforceable by state law. According to the court, however, both Texas Civil Practice and Remedies Code § 171.002 and the Uniformity Clause of the Texas Constitution, Article VIII, Section 1, to the extent it “requires a judicial forum for all tax-related disputes, notwithstanding otherwise valid private agreements to arbitrate,” were preempted by the FAA.

Finally, Johnson argued that enforcement of the arbitration agreement would violate the Due Process and Equal Protection Clauses of the Fourteenth Amendment to the United States Constitution. Although Johnson alleged that AT&T acted as the state’s collection agent, his Due Process and Equal Protection arguments failed since no state action occurred,

Because a retailer is a private actor, Plaintiff’s Due Process and Equal Protection claims do not meet the threshold requirement that the alleged injury be the product of state action. Plaintiff’s attempt to circumvent this deficiency by casting his argument in terms of the State’s actions also fails because the State is not responsible for the conduct about which Plaintiff complains-the fact that he is forced to arbitrate his claims against ATTM.

After holding that Johnson signed a “valid, enforceable arbitration agreement” which covered the claims for which he filed suit, the Southern District of Texas granted AT&T’s motion to compel arbitration.

Disputing is anxiously awaiting a United States Supreme Court decision in another class-wide arbitration case against AT&T, AT&T Mobility LLC v. Concepcion. That case concerns the applicability of state law unconscionability defenses to class arbitration exclusion clauses in consumer arbitration agreements. You may read more about it here.

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