Ting v. At&t

Darcy Ting, individually and on behalf of all others similarly situated, and Consumer Action, a non-profit membership organization, both as private attorneys general, brought suit against AT&T, alleging that AT&T's Consumer Services Agreement ("CSA") violates California's Consumer Legal Remedies Act and that state's Unfair Practices Act by barring customers from, among other things, pursuing claims against AT&T on a classwide basis. Finding the CSA unconscionable and in violation of California public policy, the district court1 issued a permanent injunction against enforcement of sections 4 and 7 of the CSA. See Ting v. AT&T, 182 F.Supp.2d 902 (N.D.Cal.2002). AT&T appeals on the ground that the application of California's consumer protection laws is preempted by the Federal Communications Act and the Federal Arbitration Act. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm in part and reverse in part.

Congress enacted the Federal Communications Act ("Communications Act" or "1934 Act") in 1934. 48 Stat. 1064 (codified, as amended, at 47 U.S.C. § 151, et seq.). At the time, AT&T enjoyed a virtual monopoly over the nation's telephone service industry. The 1934 Act was intended to address the unique problems inherent in a monopolistic environment. It required telecommunications carriers to file with the Federal Communications Commission ("FCC" or "Commission") a list of tariffs, or "schedules," showing "all charges ... and ... the classifications, practices, and regulations affecting such charges." 47 U.S.C. § 203(a). The Communications Act prohibited carriers from "extend[ing] to any person any privileges or facilities in such communication, or employ or enforce any classifications, regulations, or practices affecting such charges, except as specified" in a carrier's filed tariffs. 47 U.S.C. § 203(c). "The goal of these provisions [was] to ensure that all purchasers of communications services receive[d] the same federally regulated rates." ICOM Holding, Inc. v. MCI Worldcom, Inc., 238 F.3d 219, 221 (2d Cir.2001) (citing MCI Telecomms. Corp. v. AT&T Corp., 512 U.S. 218, 229-30, 114 S.Ct. 2223, 129 L.Ed.2d 182 (1994)).

To ensure that all service providers and their customers complied with the tariff, courts developed the "filed rate doctrine," which prohibited a regulated entity from charging rates for its services other than those specified in its duly filed tariff. AT&T v. Cent. Office Tel., Inc., 524 U.S. 214, 222, 118 S.Ct. 1956, 141 L.Ed.2d 222 (1998). Under this rule, rates filed with the FCC bound both "carriers and [customers] with the force of law." Lowden v. Simonds-Shields Lonsdale Grain Co., 306 U.S. 516, 520, 59 S.Ct. 612, 83 L.Ed. 953 (1939); Brown v. MCI WorldCom Network Servs., Inc., 277 F.3d 1166, 1170 (9th Cir. 2002). The rights and liabilities defined by the tariff could not be "varied or enlarged by either contract or tort of the carrier." Cent. Office, 524 U.S. at 227, 118 S.Ct. 1956 (quoting Keogh v. Chicago & Nw. Ry., 260 U.S. 156, 163, 43 S.Ct. 47, 67 L.Ed. 183 (1922)). Therefore, federal law preempted any state-law claim seeking to enforce a contractual provision that differed from a filed rate. ICOM Holding, 238 F.3d at 221.2

Because courts applying the filed rate doctrine presumed customers had knowledge of filed rates and, in turn, prohibited customers from relying on promises of any other charge, the filed rate doctrine, in practice, led to "quite unjust" results. Fax Telecommunicaciones, Inc. v. AT&T, 138 F.3d 479, 491 (2d Cir.1998); see also Maislin Indus., U.S., Inc., v. Primary Steel, Inc., 497 U.S. 116, 127, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990). "`[T]his rule is undeniably strict and it obviously may work hardship in some cases' but ... [strict liability] `embodies the policy which has been adopted by Congress in the regulation of interstate commerce in order to prevent unjust discrimination.'" Milne Truck Lines, Inc. v. Makita, Inc., 970 F.2d 564, 569 (9th Cir.1992) (quoting Louisville & Nashville R.R. v. Maxwell, 237 U.S. 94, 97, 35 S.Ct. 494, 59 L.Ed. 853 (1915)). Consequently, in applying the filed rate doctrine, courts universally precluded the application of equitable doctrines to vary the terms of the filed rate. See Cent. Office, 524 U.S. at 222, 118 S.Ct. 1956; Ill. Cent. Gulf R.R. v. Golden Triangle Wholesale Gas Co., 586 F.2d 588, 592 (5th Cir. 1978).

By the late 1970's, technological advances and increased competition had reduced the entry costs for AT&T's competitors in the telecommunications market, and some began to argue that the continuation of extensive tariff filing only imposed unnecessary costs on new entrants and facilitated collusive pricing. MCI, 512 U.S. at 220-21, 114 S.Ct. 2223. Starting in the early 1980's, the FCC tried to prohibit tariff-filing by non-dominant carriers (i.e., those other than AT&T) on the ground that "market forces and the administration of the complaint process" could guarantee reasonable rates without the lure of collusive pricing incentives inherent in the filed rate mechanism. Sixth Report and Order, Policy and Rules Concerning Rates for Competitive Common Carrier Services, 99 F.C.C.2d 1020, 1029 (1985). But the courts rejected "mandatory detariffing" as inconsistent with the terms of the Communications Act. See MCI Telecomms. Corp. v. FCC, 765 F.2d 1186, 1193 (D.C.Cir.1985) (holding that the Commission lacked statutory authority to prohibit the filing of tariffs). Then, in 1994, the Supreme Court held that because of the "enormous importance to the statutory scheme of the tariff-filing provision," the FCC's policy of "permissive detariffing" was not a valid "modification" under 47 U.S.C. § 203. MCI, 512 U.S. at 231, 114 S.Ct. 2223. As a result, following a 15 year effort to suspend the tariff-filing obligations for telecommunication carriers, the Commission was forced to wait for Congress to act.

The Telecommunications Act of 1996, Pub.L. No. 104-104, 100 Stat. 5, (codified as interspersed amendments to the Communications Act) ("1996 Act"), fundamentally altered the Communications Act's regulatory scheme. The 1996 Act effectively adopted the FCC's detariffing rationale. The purpose of the 1996 Act was "to provide for a pro-competitive, deregulatory national policy framework ... by opening all telecommunications markets to competition." H.R. Conf. Rep. No. 104-458, at 113 (1996), reprinted in 1996 U.S.C.C.A.N. (100 Stat. 5) 124. The 1996 Act directed the FCC to:

forbear from applying any regulation or any provision of this chapter if the Commission determines that —

(1) enforcement of such regulation or provision is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;

(2) enforcement of such regulation or provision is not necessary for the protection of consumers; and

(3) forbearance from applying such provision or regulation is consistent with the public interest.

47 U.S.C. § 160(a).

Finally armed with the requisite congressional authorization, the FCC promptly issued a Notice of Proposed Rulemaking on March 25, 1996, to "forbear from applying" the tariffing requirements of § 203 of the 1934 Act. Notice of Proposed Rulemaking, 11 F.C.C.R. 7,141 (1996). In the Notice, the Commission tentatively concluded that tariffs were no longer necessary because market forces were sufficient to protect consumers from unjust and unreasonable rates, terms, and conditions. Id. at ¶¶ 30, 31 (concluding that removing filing requirement will promote competition and prevent collusive pricing). Following a comment period, the FCC issued an order of mandatory detariffing on October 29, 1996, see Second Report and Order, 11 F.C.C.R. 20,730 (1996), thus confirming that "enforcement of the tariffing provision is neither necessary to ensure just and reasonable, non-discriminatory rates, nor necessary for the protection of consumers." MCI WorldCom, Inc., v. FCC, 209 F.3d 760, 763 (D.C.Cir.2000) (citing Second Report and Order, 11 F.C.C.R. 20,730, at ¶ 21).

Under mandatory detariffing, rather than having carriers file their rates, terms, and conditions with the FCC, the Commission required telecommunications carriers to establish contracts with consumers governing the rates, terms, and conditions of interstate long distance service. Policy and Rules Concerning the International, Interexchange Marketplace, FCC Docket No. 01-93, at ¶ 9 (2001). On December 23, 1996, AT&T filed a petition for limited reconsideration and clarification with the FCC, requesting, among other things, that the Commission clarify that neither the effect nor intent of the detariffing order was to subject the rates, terms, and conditions of interstate telecommunications services to state law. Order on Reconsideration, 12 F.C.C.R. 15,014, at ¶ 76 (1997). AT&T's petition suggested that parties may misinterpret the Second Report and Order's statement that "consumers will also be able to pursue remedies under state consumer protection and contract laws," as permitting challenges under state law to the lawfulness of rates, terms, and conditions for interstate services. See id. Specifically, AT&T argued that any other interpretation of the detariffing order should be foreclosed by "numerous judicial decisions recognizing that §§ 201(b) and 202(a) of the Communications Act preempt state law with respect to the reasonableness of rates, terms, and conditions for interstate telecommunications services." See id.

The Commission's response to the petition has led to considerable confusion. The FCC stated that while the Communications Act "continues to govern determinations as to whether rates, terms, and conditions of interstate ... services are just and reasonable, and are not unjustly or unreasonably discriminatory ... the [Communications Act] does not govern other issues, such as contract formation and breach of contract, that arise in a detariffed environment." Id. at ¶ 77. The Commission added: "As stated in the Second Report and Order, consumers may have remedies under state consumer protection and contract laws as to issues regarding the legal relationship between the carrier and customer in a detariffed regime." Id.

AT&T began implementing its detariffing obligation in the summer of 2000. AT&T's CSA included a series of provisions designed to limit customers' rights and remedies in the event of a dispute with AT&T.3 These provisions are contained in sections 4 and 7 of the CSA and are collectively known as the "Legal Remedies Provisions." Section 4 limits AT&T's liability for claims other than negligence to the amount of charges for service during the affected period and precludes liability for punitive, reliance, special, and consequential damages. Section 7(a) mandates binding arbitration and bans all class-wide dispute resolution.4 The CSA also contains a secrecy provision for all arbitration proceedings and requires consumers to bring all claims within a two-year limitations period.

Before presenting the CSA to its customers, AT&T conducted extensive market research designed to predict how consumers would react to the CSA, which AT&T planned to mail with a cover letter and a set of frequently asked questions. AT&T's cover letter stated in bold text "[P]lease be assured that your AT&T service or billing will not change under the AT&T Consumer Services Agreement; there's nothing you need to do." AT&T's market study concluded that most customers "would stop reading and discard the letter" after reading this disclaimer. AT&T did not change the substance of the letter as a result of its market research — indeed, internal AT&T documents indicate that the letter was specifically intended to make customers less alert to the details of the CSA.

AT&T mailed the CSA in two separate mailings. To approximately 18 million of its residential, long-distance customers, AT&T included the materials in the envelope that contained the customer's monthly bill. No statement regarding the new agreement appeared on the outside of the envelope. To its remaining 42 million residential, long-distance customers, AT&T mailed the CSA and other materials in a separate envelope marked, "ATTENTION: Important information concerning your AT&T service enclosed." According to AT&T's research, only 25 percent of its customers were likely to open the separate mailing, approximately 10 percent would not even look at it, and only 30 percent would actually read the entire contract.

Sometime in July 2001, plaintiff Ting received, opened, and read the mailing from AT&T. Like most of AT&T's customers, she was not aware of AT&T's obligation under mandatory detariffing to forge contracts with its residential customers and was not expecting a contract from AT&T. The CSA and letter advised customers that by continuing to use or to pay for AT&T's service, the customer was accepting the terms of the CSA through the so-called "negative option". The second paragraph of the CSA itself provided that, in the event a customer did not wish to be bound by the CSA, the customer could call a toll-free number and cancel his or her AT&T service. The cover letter advised customers that the CSA described AT&T's "new binding arbitration process, which used an objective third party rather than a jury for resolving any disputes that may arise." The letter never mentioned the word "contract," but instead spoke of "providing information" to customers. Finally, the CSA did not include a provision informing customers that federal law would govern its relationship with AT&T, but instead included an express New York state law choice-of-law provision.

Plaintiffs Ting and Consumer Action brought a state-court class action against AT&T for declaratory and injunctive relief, alleging that the Legal Remedies Provisions violate California's consumer protection and contract laws. AT&T argued that it had satisfied California's contract-formation requirements as required in the Second Report and Order, 11 F.C.C.R. 20,730, at ¶ 77, and that in any event, plaintiffs' substantive challenges to the lawfulness of the CSA were preempted by the Communications Act. After concluding that the Legal Remedies Provisions violated California's public policy and unconscionability law, the district court concluded that neither § 201(b) nor § 202(a) of the 1934 Act preempted state law in the detariffed environment because Congress removed the filing requirement with the intention of ending the preemptive regime of the filed rate doctrine. See Ting, 182 F.Supp.2d at 927-38.

We review for abuse of discretion the district court's grant of a permanent injunction, but review any determination underlying the grant of an injunction by the standard that applies to that determination. LaVine v. Blaine Sch. Dist., 257 F.3d 981, 987 (9th Cir.2001), cert. denied, ___ U.S. ___, 122 S.Ct. 2663, 153 L.Ed.2d 837 (2002). Accordingly, we review the district court's factual findings under the clearly erroneous standard. Berkla v. Corel Corp., 290 F.3d 983, 990 (9th Cir.2002), amended by 302 F.3d 909 (9th Cir.2002). The district court's conclusion that the CSA was unconscionable raises a question of law subject to de novo review. Am. Bankers Mortgage Corp. v. Fed. Home Loan Mortgage Corp., 75 F.3d 1401, 1412 (9th Cir.1996); Arcwel Marine, Inc. v. Southwest Marine, Inc., 816 F.2d 468, 470 (9th Cir.1987). We review de novo the district court's preemption analysis. AGG Enters. v. Wash. County, 281 F.3d 1324, 1327 (9th Cir.2002).

AT&T contends that §§ 201(b) and 202(a) of the Communications Act contain a principle against preferential and discriminatory rates, which preempts the application of state contract and consumer protection laws prohibiting the terms contained in the Legal Remedies Provisions. One circuit court recently agreed with this novel argument. In Boomer v. AT&T Corp., 309 F.3d 404 (7th Cir.2002), the Seventh Circuit held that, "read together," §§ 201(b) and 202(a) preempt state law challenges to the validity of AT&T's arbitration clause banning class-action lawsuits. Id. at 418. The court reasoned that permitting state law challenges to the CSA's arbitration provision would violate the Communication Act's principle of uniform rates and could threaten AT&T's ability to offer its customers the lowest possible price in violation of § 202(a)'s principle against "preferences" and "unreasonable discrimination." Id. at 419-20.

Because we do not believe that state contract and consumer protection laws obstruct Congress' "chosen means" for effectuating the purposes of §§ 201(b) and 202(a) in a detariffed environment, we respectfully disagree with the Boomer court's conclusion. Examining "the provisions of the whole law, and ... its object and policy," Gade v. Nat'l Solid Wastes Mgmt. Ass'n, 505 U.S. 88, 98, 112 S.Ct. 2374, 120 L.Ed.2d 73 (1992) (citing Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 51, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987)), we reject AT&T's argument as contrary to both the text and structure of the 1934 Act and the clear intent of Congress in enacting the 1996 Act.

Pursuant to the Supremacy Clause, U.S. CONST., ART. VI, cl. 2, federal law can preempt and displace state law through: (1) express preemption; (2) field preemption (sometimes referred to as complete preemption); and (3) conflict preemption. See Pac. Gas & Elec. Co. v. Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 204, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983); Int'l Paper Co. v. Ouellette, 479 U.S. 481, 491, 107 S.Ct. 805, 93 L.Ed.2d 883 (1987). Express preemption exists where Congress enacts an explicit statutory command that state law be displaced.5 See Morales v. Trans World Airlines, Inc., 504 U.S. 374, 382, 112 S.Ct. 2031, 119 L.Ed.2d 157 (1992). Absent explicit preemptive text, we may still infer preemption based on field or conflict preemption, both of which require us to imply Congress' intent from the statute's structure and purpose. See Sprietsma v. Mercury Marine, ___ U.S. ___, ___, 123 S.Ct. 518, 527, 154 L.Ed.2d 466 (2002); FMC Corp. v. Holliday, 498 U.S. 52, 56-57, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990).

Field preemption exists "`where the scheme of federal regulation is sufficiently comprehensive to make reasonable the inference that Congress "left no room" for supplementary state regulation.'" Petitioning Creditors v. Matsco, Inc. (In re Cybernetic Servs., Inc.), 252 F.3d 1039, 1045-46 (9th Cir.2001) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947)). Even when Congress has not occupied the field, we may still infer preemption if there is an "actual conflict" between federal and state law. Conflict preemption is found where "compliance with both federal and state regulations is a physical impossibility," Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43, 83 S.Ct. 1210, 10 L.Ed.2d 248 (1963), or where state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress," Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941); Geier v. Am. Honda Motor Co., 529 U.S. 861, 899, 120 S.Ct. 1913, 146 L.Ed.2d 914 (2000) (quoting Freightliner Corp. v. Myrick, 514 U.S. 280, 287, 115 S.Ct. 1483, 131 L.Ed.2d 385 (1995)).

When considering preemption, no matter which type, "[t]he purpose of Congress is the ultimate touchstone." Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992); New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 655, 115 S.Ct. 1671, 131 L.Ed.2d 695 (1995). Where the statute does not speak directly to the issue, we look to "the goals and policies of the Act in determining whether it in fact preempts an action." Ouellette, 479 U.S. at 493, 107 S.Ct. 805. As explained in Gade, "[o]ur ultimate task in any preemption case is to determine whether state regulation is consistent with the structure and purpose of the statute as a whole." 505 U.S. at 98, 112 S.Ct. 2374; Cal. v. Fed. Energy Regulatory Comm'n, 495 U.S. 490, 504, 110 S.Ct. 2024, 109 L.Ed.2d 474 (1990). Ordinarily, we also apply a presumption against preemption. However, "when the State regulates in an area where there has been a history of significant federal presence," United States v. Locke, 529 U.S. 89, 108, 120 S.Ct. 1135, 146 L.Ed.2d 69 (2000), the presumption usually does not apply, id.; Bank of Am. v. City & County of San Francisco, 309 F.3d 551, 558 (9th Cir. 2002). Thus, we do not apply the presumption against preemption in this case because of the long history of federal presence in regulating long-distance telecommunications.

Sections 201(b) and 202(a) do not contain preemptive text, so express preemption is not an issue here. Likewise, field preemption is not an issue because state law unquestionably plays a role in the regulation of long-distance contracts. See Boomer, 309 F.3d at 424 (rejecting AT&T's field preemption argument, overruling in part Cahnmann, 133 F.3d at 489-90, which previously held that the Communications Act completely preempted state law, and stating that "following detariffing there appears to be some role for state law"); Marcus v. AT&T Corp., 138 F.3d 46, 54 (2d Cir.1998) (holding that the Communications Act does not "manifest a clear Congressional intent to preempt state law actions prohibiting deceptive business practices, false advertising, or common-law fraud"). Indeed, even AT&T concedes that state law now governs the formation of consumer long-distance contracts. See Boomer, 309 F.3d at 424 (citing 12 F.C.C.R. 15,014, at ¶ 77). Detariffing has created a much larger role for state law and this fact is sufficient to preclude a finding that Congress intended completely to occupy the field, following the 1996 Act. We therefore focus exclusively on AT&T's claim of implied conflict preemption.

AT&T contends that the district court's order requires AT&T to "prefer" California customers at the expense of its customers in the remaining 49 states. AT&T argues that, as a result, it has been exposed to liability from unhappy non-Californians, some of whom may charge AT&T with unlawfully and unreasonably preferring the "locality" of California in violation of 47 U.S.C. § 202(a). In other words, AT&T claims that it has been placed between the proverbial rock and a hard place, forced to prefer California law, and that state law must give if Congress' objectives in passing §§ 201(b) and 202(a) are to be realized. We disagree.

Section 201(b) of the Communications Act provides:

All charges, practices, classifications, and regulations for and in connection with such communication service, shall be just and reasonable, and any such charge, practice, classification or regulation that is unjust or unreasonable is declared to be unlawful.