Opposition Brief — T-Mobile USA, Inc. v. Laster (No. 07-976)

'D

FILED

(4) APR 2 5 2008

OFFICE OF THE CLERK

No. 07-976 SUPREME COURT. U.S.

IN THE

Supreme Court of the Gnited States

T-MOBILE USA, INC., OMNIPOINT COMMUNICATIONS, INC.

D/B/A T-MOBILE, AND TMO CA/NV, LLC,

Petitioners,

V.

JENNIFER LASTER, ANDREW THOMPSON, ELIZABETH

VOORHIES, ON BEHALF OF THEMSELVES AND ALL OTHERS

SIMILARLY SITUATED,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

KIRK B. HULETT*

DENNIS STEWART

HULETT HARPER STEWART

550 West C Street, Suite 1600

San Diego, CA 92101

(619) 338-1133

CRAIG M. NICHOLAS

MATTHEW B. BUTLER

NICHOLAS & BUTLER

255 Broadway, 19th Floor

San Diego, CA 92101

(619) 325-0492

DEEPAK GUPTA

SCOTT L. NELSON

BONNIE ROBIN-VERGEER

PUBLIC CITIZEN

LITIGATION GROUP

1600 20th Street NW

Washington, DC 20009

(202) 588-1000

Counsel for Respondents

April 25, 2008

ee 0 CN RE WSEAS ASAE “US ER IMTS Se RHEE oe RE PEC MPR INC SAT AEA PRET DEERE r= CD ES 7 ERTS OI ENCE

*Counsel of Record

QUESTION PRESENTED

. The Federal Arbitration Act (FAA) provides that

arbitration agreements are enforceable “save upon such

grounds as exist at law or in equity for the revocation of

any contract.” 9 U.S.C. § 2. Class-action bans—contract

provisions that prohibit classwide proceedings, whether

in litigation or arbitration—have been held to be

unconscionable in some circumstances under the

generally applicable contract law of some states. Is such |

state law preempted by the FAA when the class-action

ban to which it is applied is embedded in an arbitration

agreement?

TABLE OF CONTENTS

Reels OF RUTTER i escicisiscssenseceninsessessnsoncensosnshannon ill

MEG ERNIE BRIDES (sisencsesasnsastindinsssolncbiotinenaabieiaaiannamaae 1

SEES SODRIOIN Dn scancsesssverontnaesnaionosossansnnbrnnehasontsstebtenietensasvincs 3

REASONS FOR DENYING THE WRIT.........0..........000.. 7

I. There Is No Conflict Over the Question Presented. ...8

A. Every Court That Has Decided the Question

Presented Has Reached the Same Conclusion. ...8

B. The Third Circuit’s Opinion in Gay Does Not

Ce 0 CI science 10

C. There Is No Broader Conflict of Federal Law

Concerning the Enforceability of Class-Action

| SR dea PRONE a SLRs VER RIA MNS: IRI MEN ® 17

II. T-Mobile’s Claim of a Conflict With This Court’s

Precedent Restates Its Misguided Preemption

Theory, Which Has Not Been Adopted By Any

|, MOI URICO ? SERDAR EC SOTO NOS TA BAATTO Nile RR UE IER OM PRON CEN 21

STEIN aRITO RAIDS cicstrannkcassiiipnvtiueicicrsiakeitatncsasiessisnilsceaseanaeaalals 24

-jii-

TABLE OF AUTHORITIES

Cases: Page(s)

Circuit City Stores, Inc. v. Gentry,

OR icicles consnacaviaisiaisecuaretataccoiey 1

Coady v. Cross Country Bank,

729 N.W.2d 732 (Wis. App. 2007) .............006. 9

Creighton v. Blockbuster, Inc.,

2007 WL 1560626 (D. Or. 2007) ..............0..00 10

Dale v. Comcast Corp.,

406 F Sd 1276 (ith Cir. 2007)...........sesiene0s 9,19

Delta Funding v. Harris,

DEE Be MORON a. DOD) no snes cccccsccsccccsopesans 20

Delta Funding v. Harris,

Me Fe Oe CO Ct ZDG)... 2... os cn snsccecnnscss 16

Delta Funding v. Harris,

BE rh OIE. BOG) vivian vccinsencescensesince 16

Discover Bank v. Superior Court of Los Angeles,

113 P.3d 1100 (Cal. 2005)......... eee passim

Diz v. ICT Group, Inc.,

16) PS 1016: (Wah: 2007). .....0....00.0ccceseees 23

Doctor’s Associates, Inc. v. Casarotto,

BE See Me iiss catback canceaveuknuadsncka 4,22

-iv-

Gay v. Creditinform,

511 F.3d 369 (8d Cir. 2007)........ccccsseee. passim

Green Tree Financial Corporation v. Bazzle,

EE ee, No icy catuacissmevadocnsansiacen 3

Hollins v. Debt Relief of America,

479 F. Supp. 2d 1099 (D. Neb. 2007)............. 10

Homa v. American Express Co.,

1 Ai, A PO SIE L\ cinacccnanducendensasgae 15

Ji enkins 0. First America Cash Advance of Ga.,

400. F.3d 868 (Lith Cir. 2005).................ee0e 19

Johnson v. West Suburban Bank,

Sa FO GOO Ct CIP. BOD). ccscccsccscccuccscscves 18

Kinkel v. Cingular Wireless LLC,

857 N.E.2d 250 (Ill. 2006)........+.-2++e00008, 17, 21

Kristian v. Comcast Corp.,

MO FE Pe CRI Ee, Bio ons ccs cncccnssserens 18

Leonard v. Terminiz International Co., L.P.,

BEA So, St GAP CAM, BOOZ) on ivcccsicccocnssacseseeceas 9

Livingston v. Associates Finance Inc.,

839 F.3d 553 (7th Cir. 2008)............0censcceses 18

Lowden v. T-Mobile USA,

512 F.3d 1213 (9th Cir. 2008)................... 9,15

-Vy-

Lytle v. CitiFinancial Services, Inc.,

810 A.2d 648 (Pa. Super. Ct. 2002)............... 12

Management Enterprises, Inc. v. Thorncroft

Co., 416 S.E.2d 229 (Va. 1992).........cccccceseeee 11

Merrill, Lynch, Pierce, Fenner & Smith, Inc. v.

Clemente, 2008 WL 857756 (3d Cir. Mar. 31,

Muhammad v. County Bank of Rehoboth, Del.,

912 A.20 SS. CN.d: ZOGB).......c.ccccccecse 8, 17, 20, 21

Perry v. Thomas,

a es capdcenncncncend’ et 22

Randolph v. Green Tree Finance Corp.,

264 F.3d G14 (ith Cir. 2001).............cccccccvee 18

Reuter v. Davis, 2006 WL 3743016 (Fila.

Nee cc naniatasinnenlinin 9

Salley v. Option One Mortgage Corp.,

PPR OU CRM IT Raascnscncscssevcncccavesscns st 17

Scott v. Cingular Wireless,

161 P.3d 1000 (Wash. 2007)..................08. 8, 21

Shroyer v. New Cingular Wireless Services,

Inc., 498 F.3d 976 (9th Cir. 2007)...... 6, 9,21, 22

Snowden v. Checkpoint Cashing,

290 F.3d 631 (4th Cir. 2002)............... cc cece 18

-yj-

Southland Corp. v. Keating,

i cmednansndilinsionsiotnl 14

State ex rel. Dunlap v. Berger,

He see UO Ws ND aise ann scccssncncsncasnenocnses 8

Thibodeau v. Comcast Corp.,

912 A.2d 874 (Pa. Super. Ct. 2006)... ce cesessseeeees 12

Tillman v. Commercial Credit Loans, Inc.,

ee ey Cp NI) avensncisccccasccossscencvcnsocossseassnne 8

Ting v. AT&T,

Bee Be Be CIT. UD vesissnceccessesvecsessnsecasesenosece 9

Vasquez-Lopez v. Beneficial Oregon, Inc.,

BER ae PR CE, PAU, DOE) asnsersevscisrcsnscnsoresecesacesncannees 9

Whitney v. Alitel Communications, Inc.,

173 S.W.3d 300 (Mo. App. 2005)...............cescscseseceeeees 9

Wong v. T-Mobile USA, Inc.,

2006 WL 2042512 (E.D. Mich. 2006) .....0......cccceseee 10

Zimmer v. Cooperneff Advisors, Inc.,

--- F.3d ---, 2008 WL 1700526 (3d Cir. Apr. 14,

a sstiuslonnunnatadianed es 12, 16

Statutes and Rules:

REESE an a i, 4, 22

ne STE Petetencinactoshipeessasinchninnsnaninanenuniemimbsscteteese 14

Sk ech, Ae NI inescitcditstaiinnissncintnhincorsonsnbanctihancpaainioe 14

Other Authorities:

Carole Buckner,

Toward a Pure Arbitral Paradigm of Classuide

Arlitration: Arbitral Power and Federal Preemp-

tion, 82 Denv. U.L. Rev. 301 (2004)................... 3

Atlin Kaplinsky,

Scorecard on Class-Action Waivers,

bg He 7 ae || SERRE 12

Eugene Gressman, et al.,

Supreme Court Practice (9th ed. 2007)......... 15, 21

>

INTRODUCTION

T-Mobile asks this Court to review a question on

which the state and federal courts unanimously agree:

Whether the Federal Arbitration Act (FAA) categori-

cally preempts any state-law determination that a class-

action ban is unconscionable if that ban is embedded in

an arbitration clause. Just last month, in Circuit City

Stores, Inc. v. Gentry, No. 07-998, this Court denied a

petition raising the same question, and it should do the

same here.

Every state and federal court to confront the ques-

tion presented has reached the same conclusion—that

the FAA, as its plain text indicates, does not preclude

courts from assessing on a case-by-case basis and in a

manner that does not discriminate against arbitration

whether class-action bans are unconscionable under

generally applicable state contract law. These courts

include the highest courts of California, Illinois, New

Jersey, Washington, North Carolina, Alabama, and West

Virginia, as well as the Eleventh Circuit (considering

Georgia law) and the Ninth Circuit (considering

California and Washington law). 7

Despite that unanimity, T-Mobile tries to create a

conflict by exaggerating the significance of speculative

closing remarks in a single opinion, Gay v. Creditinform,

511 F.3d 369 (38d Cir. 2007), in which FAA preemption

was not dispositive. Gay held that an unconscionability

claim failed as a matter of Virginia law, not federal law.

To be sure, the opinion went on to discuss how the case

might be decided if Pennsylvania law were applicable,

speculating that “we would reach the same result,

largely because [of] federal law.” Jd. at 392. But that

speculation was specifica'ly limited “to the extent” that

Pennsylvania law would, alone among the states, insist

-2-

on “the right to bring judicial class actions,” as opposed

to classwide relief in either litigation or arbitration. /d. at

394. Such a state-law rule differs markedly from the law

of other states and would likely be preempted because,

unlike the California law applied in this case, it would

flatly discriminate against arbitration—and class

arbitration in particular.

Thus, Gay does not create a conflict on a question of

federal law but, at best, merely identifies a potential

difference in state law that might lead to different

consequences for FAA preemption—as the Ninth Circuit

recently recognized when it distinguished Gay on that

basis in Lowden v. T-Mobile USA, Inc., 512 F.3d 1218,

1221 n3 (9th Cir. 2008). And even that state-law

difference is more imagined than real, because

Pennsylvania’s highest court has yet to decide the state-

law question and has abrogated the lower-court decisions

on which Gay relied.

Finally, T-Mobile stretches to create a broader

conflict over the enforceability of class-action bans, but

the cases it cites do not even reach the FAA preemption

issue presented in this case. Most of these cases decide

whether class-action bans conflict with specific federal

remedial statutes, while others determine whether

parti lass-action bans violate the unconscionability

doctrin f' specific states. Differing outcomes

concerning the enforceability of class-action bans are not

a reflection of any conflict over FAA preemption, but are

instead the inevitable consequence of an analysis that is

fact- and context-specific and that turns (as AT&T’s

amicus brief point out) on the evolving design of the

contracts themselves.

Given the absence of any conflict on the question

presented—and given the serious danger that review at

-2.

this time would unnecessarily inhibit the evolution of

arbitration agreements in the marketplace, the law

governing their enforceability, and the development of

efficient classwide arbitration procedures—the petition

should be denied.

STATEMENT

A. Class Arbitration and Class-Action Bans

Despite its potential to combine the efficiencies of

both arbitration and the class-action device, American

courts have until recently demonstrated a hostility to |

classwide arbitration. That hostility is “a remnant of the

historic mistrust of the arbitral process” that the FAA

was intended to eradicate. Buckner, Toward a Pure

Arbitral Paradigm of Classwide Arbitration: Arbitral

Power and Federal Preemption, 82 Denv. U.L. Rev. 301,

301 (2004); see also Discover Bank v. Superior Court,

113 P.3d 1110, 1113 (Cal. 2005) (view that “arbitration is

an inferior forum and therefore cannot be trusted with

classwide claims” reflects “the very mistrust of

arbitration that has been repudiated by the United

States Supreme Court” and the FAA). Despite its

invocation of the FAA, T-Mobile’s position bristles with

that same hostility. Indeed, the court below would have

sent this case to arbitration had T-Mobile’s form contract

not insisted on a judicial forum in the event its class-ban

was held unenforceable. Pet. App. 37a-37a.

An important turning point in the evolution of class-

wide arbitration came in Green Tree Financial

Corporation v. Bazzle, 539 U.S. 444 (2003), when a

majority of this Court rejected the argument that class

actions are incompatible with arbitration. Following

Bazzle, major arbitration organizations in the United

States, such as the American Arbitration Association,

adopted classwide arbitration rules, and hundreds of

ik

class arbitrations began to appear on their dockets. See

Buckner, supra, at 333-34. Some businesses, like T-

Mobile, however, responded by attempting to insulate

themselves from any type of classwide proceeding by

embedding class-action bans in their arbitration

agreements.

Class-action bans are contract provisions that strip

consumers or employees of the right to seek any

classwide relief (whether through class-action litigation

or classwide arbitration). Under the general contract law

of many states, such provisions may be unconscionable

where the inability to seek any form of classwide relief

effectively exculpates the drafter from potential liability

for individually small claims involving widespread

practices. State law in this regard arises from generally

applicable rules relating to all sorts of exculpatory

contract terms, and applies equally to bans of class-

action litigation in contracts without arbitration clauses

as it does to bans of class arbitration in contracts with

such clauses.

Under the FAA, arbitration agreements are valid and

enforceable “save upon such grounds as exist at law or in

equity for the revocation of any contract.” 9 U.S.C. § 2

(emphasis added). This Court has_ consistently

interpreted that savings clause to mean that “generally

applicable contract defenses such as fraud, duress, or

unconscionability, may be applied to _ invalidate

arbitration agreements without contravening § 2” of the

FAA. Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681,

687 (1996). The sole question presented by T-Mobile’s

petition is whether the FAA preempts a state-law

determination that a particular class-action ban is

unconscionable, where that ban happens to be found in

an arbitration clause.

£-

B. Factual and Procedural Background

Elizabeth Voorhies and Jennifer Laster are Califor-

nians who purchased wireless phones and service plans

from Cingular (now AT&T) and T-Mobile, respectively.

AT&T is the largest wireless telephone company in the

United States; T-Mobile is the fourth largest. Voorhies

and Laster brought a putative class action against both

companies, alleging that they violated state consumer-

protection law by charging sales tax on the full retail

value of the phones, which were advertised as “free” or

substantially discounted. Both companies separately

moved to compel arbitration. Invoking class-action bans

embedded in arbitration agreements, the companies

insisted on individual rather than classwide arbitration.

At the time Laster received her phone from T-

Mobile, she signed a one-page Service Agreement, which

identified her plan rates and the equipment she

purchased but mentioned neither mandatory arbitration

nor a class-action ban. Pet. App. 8a-9a. Inside the sealed

box containing her phone was a copy of T-Mobile’s fifty-

two page “Welcome Guide.” Jd. 9a. Within that Welcome

Guide, along with general information about the phone

itself, was a mandatory binding arbitration clause that

purported to prohibit any consumer from representing

“other potential claimants or a class of potential

claimants in any dispute” with T-Mobile. Jd. 37a. The

clause also included a provision stating that in the event

the class-action ban was unenforceable, the arbitration

agreement would not apply, and any dispute would be

resolved in a court. Jd. When she bought her phone from

AT&T, Voorhies was likewise given an arbitration

agreement containing a class-action ban. /d. 6a-8a.

££.

The district court, relying on the California Supreme

Court’s decision in Discover Bank, 113 P.3d 1110,

concluded that the class-action bans in both companies’

agreements were unconscionable under California law

because, among other things, they were contained in

contracts of adhesion and would exculpate the companies

from a claim that the party with superior bargaining

power had carried out a scheme to deliberately cheat

large numbers of consumers out of individually small

sums of money. Pet App. 20a. Adhering to the position of

all other courts to decide the question, the district court

also held that this state-law ruling did not discriminate

against arbitration, and hence was not preempted by the

FAA, because it was based on general contract-law

principles that applied equally to contracts with or

without arbitration agreements. Jd. 24a.

Both AT&T and T-Mobile appealed. While the case

was pending, the court of appeals issued its decision in

Shroyer v. New Cingular Wireless Servs., Inc., 498 F.3d

976 (9th Cir. 2007), which held that California law

holding some class-action bans unconscionable, as

articulated in Discover Bank, was not preempted by the

FAA. In this case, the court of appeals affirmed in an

unpublished memorandum, holding that Shkroyer had

already “expressly and conclusively” rejected the

argument that the application of California’s unconscion-

ability law to class-action bans in arbitration clauses is

preempted by the FAA. /d. 1a-2a.

AT&T dropped” its appeal after the decision in

Shroyer was issued and did not petition for certiorari.

Indeed, before this Court, AT&T has filed an amicus

brief recommending that the Court deny the petition,

arguing that review based on the outdated, “second

zeneration” agreement at issue in this case would not

7.

only be premature and unnecessary in light of the

absence of any conflict, but would affirmatively interfere

with the ongoing evolution of class-action bans in

arbitration agreements, and the state law concerning

their enforceability. That evolution, AT&T argues, has

already produced “third generation” agreements more

protective of consumer rights than the arbitration clause

at issue here, and may ultimately result in agreements

that pass muster under state law, thus obviating any

perceived need for review of the federal question

presented.

REASONS FOR DENYING THE WRIT

T-Mobile repeatedly describes this case as present-

ing the question whether courts may refuse to enforce

arbitration agreements on the grounds that “individual

arbitration” is unconscionable. By framing the issue in

this way, T-Mobile attempts to obscure the fact that it is

its position, not respondents’, that is hostile to

arbitration, and to class arbitration in particular. T-

Mobile already has the right to compel arbitration. What

it seeks is the ability to use a class-action ban that it

placed within an arbitration clause to exculpate itself

from any liability for small consumer claims, by

precluding classwide proceedings of any kind, in any

forum, including an arbitral forum.

The court below did not hold that the class-action ban

in this case was unconscionable because it happened to

be contained within an agreement to arbitrate. To the

- contrary, it held, as a matter of state law, and based on

the circumstances of this case—a case involving very

small individual claims spread across a large class of

people—that an adhesion contract provision denying the

opportunity for classwide relief (whether in litigation or

in arbitration) is an unenforceable exculpatory provision.

-.,

Because that conclusion is based on generally applicable

contract law that applies equally to contracts with or

without arbitration clauses, it is not preempted by the

FAA merely because the provision in question happens

to be found in an arbitration agreement. Indeed, no

federal appellate court or state court of last resort has

held that such an even-handed application of state

unconscionability doctrine is preempted by federal law.

In the absence of such a conflict, T-Mobile offers no

persuasive reason for this Court to review an unpub-

lished opinion presenting precisely the same question on

which it has recently declined review

I. THERE IS NO CONFLICT OVER THE

QUESTION PRESENTED.

A. Every Court That Has Decided the Question

Presented Has Reached the Same Conclusion.

There is no conflict among the courts over the ques-

tion presented. Every state court of last resort and every

federal circuit to have decided the question has reached

the same conclusion: The FAA does not preclude courts

from assessing whether particular class-action bans are

unconscionable under generally applicable state contract

law.

To date, seven state.courts of last resort have issued

decisions on the question presented. Five state high

courts—California, Illinois, New Jersey, Washington,

and North Carolina—have recently held that the FAA

does not preempt state-law determinations, under

generally applicable contract law, that particular class-

action bans may be unconscionable. See Discover Bank,

113 P.38d at 1110-17; Muhammad v. County Bank of

Rehoboth, Del., 912 A.2d 88, 94-96 (N.J. 2006), cert.

denied, 127 S. Ct. 2032 (2007); Kinkel v. Cingular

Wireless LLC, 857 N.E.2d 250, 260-63 (Ill. 2006); Scott v.

-9-

Cingular Wireless, 161 P.3d 1000, 1008-09 (Wash. 2007);

Tillman v. Commercial Credit Loans, Inc., 655 $.E.2d

362, 373 (N.C. 2008). These recent decisions are

consistent with two pre-Bazzle rulings by the supreme

courts of Alabama and West Virginia.’ In addition, lower

state courts in Missouri, Florida, Wisconsin, and Oregon—_

have reached the same conclusion.”

The federal circuits that have decided the FAA

preemption question have come to the same conclusion.

The Eleventh Circuit and the Ninth Circuit have both

recently issued decisions finding particular class-action

bans unconscionable under state law and rejecting claims

of FAA preemption. See Dale v. Comcast Corp., 498 F.3d

1216, 1219 (11th Cir. 2007) (Georgia law); Shroyer v. New

Cingular Wireless Services, Inc., 498 F.3d 976, 987-93

(9th Cir. 2007) (California law); Lowden v. T-Mobile

USA, 512 F.3d 1218, 1219-22 (9th Cir. 2008) (Washington

law). These holdings are consistent with earlier Ninth

Circuit precedent predicting California law prior to

' Leonard v. Terminix Int'l Co., L.P., 854 So. 2d 529, 535-36

(Ala. 2002) (FAA does not preempt challenge to class-action ban on

state-law unconscionahility grounds; such a challenge does not

discriminate against arbitration because the analysis “would be the

same if the contract merely prohibited assertion of claims on a class-

wide basis” in litigation); State ex rel. Dunlap v. Berger, 567 S.E.2d

265, 272 n.3 (W. Va.), cert. denied, 587 U.S. 1087 (2002) (FAA does

not bar application of generally applicable contract defense of

unconscionability to strike class-action ban).

2 Vasquez-Lopez v. Beneficial Oregon, Inc., 152 P.3d 940,

944 (Or. App. 2007); Coady v. Cross Country Bank, 729 N.W.2d 732,

748 (Wis. App.), review denied, 737 N.W.2d 432 (Wis. 2007); Reuter

v. Davis, 2006 WL 3743016, at *2 (Fla. Cir. Ct. Dec. 12, 2006);

Whitney v. Alltel Communications, Inc., 173 S.W.3d 300, 308, 310

(Mo. App. 2005).

-10-

Discover Bank.* Several federal district courts in various

states have similarly held that the FAA does not stand as

a barrier to a determination that class-action bans are

unenforceable under generally applicable state-law

unconscionability doctrine.*

B. The Third Circuit’s Opinion in Gay Does Not

Create a Conflict.

Against the unanimous position of the courts that

have actually decided the question presented, T-Mobile

pits the closing remarks in a single recent opinion in

which FAA preemption was not even a dispositive issue.

According to T-Mobile, the Third Circuit, in Gay v.

Creditinform, 511 F.3d 369 (3d Cir. 2007), dramatically

broke ranks with all other courts and “ruled” that the

FAA categorically “precludes a court from refusing to

enforce an agreement to arbitrate individually based

upon a_ state-law determination that individual

arbitration of small consumer claims is unconscionable.”

Pet. 2.

That description does not reflect the holding of the

Third Circuit—or, for that matter, the holding of any

court anywhere. In fact, Gay disposed of the plaintiffs

unconscionability challenge on the basis of Virginia law,

not FAA preemption. The agreement at issue contained

a Virginia choice-of-law clause, and the court was fully

“satisfied that there [was] no reason not to honor the

3 Ting v. AT&T, 319 F.3d 1126, 1150 (9th Cir.), cert. denied, 540

US. 811 (2003).

* See, e.g., Creighton v. Blockbuster, Inc., 2007 WL 1560626

(D. Or. 2007); Wong v. T-Mobile USA, Inc., 2006 WL 2042512 (E.D.

Mich. 2006); Hollins v. Debt Relief of America, 479 F. Supp. 2d 1099

(D. Neb. 2007); Doerhoff v. General Growth Props., Inc., 2006 WL

3210502 (W.D. Mo. 2006).

-11-

parties’ choice of Virginia law in considering the

unconscionability claim.” 511 F.3d at 390 (“[Wle will

apply Virginia law in considering the enforceability of

the arbitration provision.”). Applying the standards set

by the Virginia Supreme Court, the court held that the

agreement was not unconscionable as a matter of state

law. Id. at 391-92 (citing Mgmt. Enters. Inc. v.

Thorncroft Co., 416 $.E.2d 229, 231 (Va. 1992)). In

reaching this conclusion, Gay reiterated the rule that

generally applicable state law controls the unconscion-

ability analysis. Jd. at 388 (“federal courts may apply

state law pursuant to section two of the FAA” and “{iJn

particular, generally applicable contract defenses, such-

as fraud, duress, or unconscionability, may be applied to

invalidate arbitration agreements without contravening

§ 2”).

To be sure, although the Gay opinion “recognized

that courts including our court” must look to the

applicable state’s law, it also noted that “one might

wonder why the consideration of state law is so confined”

because “it is lo,ical that the law should be uniform

throughout the country.” Jd. at 388 n.13. But the court

made clear that its decision on Virginia-law grounds

made a definitive resolution of such concerns unneces-

sary: “(If a further examination of that point ever is

needed it will be at some later day as we have no need to

consider it now. The need to examine the question might

arise” if the relevant state law were “aberrational.” /d.

In the same hypothetical vein, the opinion went on to

discuss how the panel might have decided the case if

there were no choice-of-law clause, so that the law of the

Pennsylvania forum applied instead. In that scenario, it

speculated that “we would reach the same result, largely

because federal law requires that we do so and

-12-

Pennsylvania law must conform with federal law.” Jd. at

392. This discussion of Pennsylvania law was doubly

hypothetical, as it was premised not on an authoritative

construction of state law, but on a pair of lower-court

decisions—Lytle v. CitiFinancial Services, Inc., 810

A.2d 643 (Pa. Super. Ct. 2002), and Thibodeau v.

Comcast Corp., 912 A.2d 874 (Pa. Super. Ct. 2006)—that

have themselves been abrogated by the Pennsylvania

Supreme Court as reflecting an improper presumption in

favor of unconscionability.°

Based only on those two now-discredited cases, Gay

assumed for purposes of its discussion that the

Pennsylvania Supreme Court—unlike the high courts of,

for example, California, [llinois or Washington—would

demand hostility to arbitration, requiring that

consumers be permitted to bring classwide proceedings

in court as opposed to in arbitration. The court

specifically limited its speculation about FAA preemp-

tion to this understanding of state law: The FAA would

preempt state law only “[tlo the extent .. . that Lytle and

Thibodeau hold that the inclusion of a waiver of the right

to bring judicial class actions in an arbitration

° See Salley v. Option One Mortgage Corp., 925 A.2d 115,

129.(Pa. 2007) (concluding that Lytle “swept too broadly’ and

reflected an improper presumption in favor of unconscionability);

see also Kaplinsky, Scorecard on Class-Action Waivers, 1657

PLI/Corp 127, 154 n.5 (2008) (citing Lytle and Thibodeau and

stating that Salley “casts serious doubt on the continued vitality of

these two opinions”). Just last week, the Third Circuit, assessing an

arbitration agreement under Pennsylvania law, recognized that the

Pennsylvania Supreme Court had “expressly abrogat{ed]” Lytle.

Zimmer v. Cooperneff Advisors, Inc., --- F.3d ---, 2008 WL 1700526,

at *6 (3d Cir. Apr. 14, 2008) (describing Lytle’s analysis as

“discredited” and reliance on the decision by federal courts as

“questionable”).

1s

agreement” is unconscionable. Jd. at 394 (emphasis

added); see also id. at 395 (describing plaintiff's

argument “that the provision is unconscionable because

of what it provides—ze. arbitration of disputes on an

individual basis in place of litigation possibly brought on

a class action basis”) (emphasis added).°

To the extent that Gay’s assumptions about Pennsyl-

vania law were correct, its hypothetical preemption

analysis, too, was likely correct because the FAA

“withdrew the power of the states to require a judicial

forum for the resolution of claims which the contracting

parties agreed to resolve by arbitration.” Southland

Corp. v. Keating, 465 U.S. 1, 10 (1984) (emphasis added).

Gay’s speculation about the potential FAA preemption of

Pennsylvania law was based, however, on an understand-

ing of Pennsylvania law that differs markedly from the

law of states like California, Illinois, or New Jersey.

Compare Gay, 511 F.3d at 394, with Muhammad, 189

N.J. at 101 (under New Jersey law, it is unconscionable

in some circumstances to deprive consumers of “the

mechanism of a class action, whether in arbitration or in

court litigation”) (emphasis added); Discover Bank, 113

P.3d at 1112 (“In the present case, the principle that

class-action waivers are, under certain circumstances,

® The unusual way in which the issue was framed in Gay

may also be a function of the fact that the unconscionability

challenge was not the chief issue on appeal. Rather, the plaintiff,

who had sued under the federal Credit Repair Organizations Act

(CROA) and a parallel state statute, contended that both statutes

gave her “a right to assert her claims in a judicial forum” and

expressly prohibited a waiver of that right. 511 F.3d at 375

(emphasis added); see 15 U.S.C. § 1679f(a) (prohibiting “[ajny waiver

by any consumer of . . . any right of the consumer” under the

CROA); id. § 1679f(c) (providing that consumers “have a right to

sue” under the CROA).

-14-

unconscionable as unlawfully exculpatory is a principle of

California law that does not specifically apply to

arbitration agreements, but to contracts generally. In

other words, it applies equally to class action litigation

waivers in contracts without arbitration agreements as it

does to class arbitration waivers in contracts with such

agreements.”). Thus, the “conflict” claimed by T-Mobile

arises not from conflicting approaches to the federal-law

question presented, but rather on underlying differences

in state law and, in particular, Gay’s understanding of a

hypothetical and unique rule of state law that would

impermissibly discriminate against arbitration.

In four different instances, T-Mobile quotes the

Ninth Circuit’s recent statement declining to “follow”

Gay in Lowden v. T-Mobile USA, Inc., 512 F.3d 1213,

1221 n.3 (9th Cir. 2008). See Pet. 2, 12, 17 n.1, 24. But T-

Mobile misleadingly omits the explanation for that

statement, which is given in the very next sentence.

Lowden did not disagree with Gay’s FAA preemption

discussion. Rather, it distinguished that discussion on

the grounds that the applicable Washington state law in

Lowden was entirely unlike the hypothetical state law

discussed in Gay. As Lowden explained, “[uJnlike” the

Pennsylvania law described in Gay, “the Washington

Supreme Court in Scott does not hold ‘that an agreement

to arbitrate may be unconscionable simply because it is

an agreement to arbitrate.” /d.; see also id. at 1221

(“[T]he Scott holding targets not the arbitration context,

but rather the class action waiver, which the Washington

State Supreme Court has determined would deprive

Washington consumers of a right generally applicable to

arbitration and litigation contracts alike and which only

happens to be within an arbitration agreement in this

case.”). This Court does not sit to resolve such

differences in state law.

-15-

T-Mobile’s claim of a conflict thus ignores the critical

differences for federal preemption analysis that may

flow from differences in state law. Indeed, T-Mobile’s

reliance on Gay as the basis for a claim of conflict is

particularly mistaken because “the state’s highest court -

has not spoken” on the state-law issue. Gressman, et al.,

Supreme Court Practice § 4.10. at 261 (9th ed. 2007).

Whether, and under what circumstances, class-action

bans are unconscionable under Pennsylvania contract

law is “a matter that ultimately rests with the highest

state court and that can be authoritatively clarified by

the highest state court in future litigation.” J/d.

Pennsylvania’s highest court has yet to decide that

question, and it is quite possible, even likely, that a

decision by that court would differ from Gay’s reading of

state law and wipe out the tenuous “conflict” claimed by

T-Mobile. The Third Circuit, moreover, has yet to

discuss the FAA preemption question presented here in

any case in which it actually affects the outcome. When

the question arises in a Third Circuit case in which

Pennsylvania provides the applicable law (unlike in Gay),

the Third Circuit would likely certify the state-law

question to the state court, as it has done recently on

other state-law unconscionability questions. Or the issue

might arise first in an appeal that comes up through the

state courts. Until then, in the absence of a decision on

the predicate state-law issue by the state’s highest court,

or even a Third Circuit case in which the outcome

actually turns on the federal preemption question, the

Third Circuit’s speculation about Pennsylvania law and

FAA preemption will remain purely academic.’

” Currently pending before the Third Circuit is an appeal

squarely raising the question whether New Jersey law concerning

(Footnote continued)

Miele bonne Stet Baad

-16-

That Gay does not reflect the categorical rejection of

the application of all state unconscionability doctrines to

class-action bans in arbitration agreements is confirmed

by the fact that the Third Circuit’s approach—before

Gay, in Gay itself, and after Gay—has been to regard

the unconscionability of a contract provision, including a

class-action ban, as a matter of general state contract

law. In Delta Funding v. Harris, 426 F.3d 671, 671 (3d

Cir. 2005), for example, the Third Circuit certified to the

New Jersey Supreme Court the “undecided issue of New

Jersey law” whether a class-action ban contained in an

arbitration clause was unconscionable under the

circumstances.* And after Gay, the Third Circuit has

continued to analyze unconscionability as a matter of

state law just as it did before. See Zimmer v. Cooperneff

Advisors, Inc., --- F.3d ---, 2008 WL 1700526 (3d Cir.

Apr. 14, 2008) (analyzing unconscionability of arbitration

clause under Pennsylvania law, without citing Gay);

Merrill, Lynch, Pierce, Fenner & Smith, Inc. v.

Clemente, 2008 WL 857756 (3d Cir. Mar. 31, 2008) (same

as to New Jersey law).

the unconscionability of class-action waivers is preempted by the

FAA. Homa v. American Express Co., 3d Cir. Case No. 07-2921.

Unlike Gay, Homa presents the question in a case in which it may

affect the outcome, and where the court has the benefit of a decision

by the state’s highest court. New Jersey’s high court has squarely

confronted the question of whether, and under what circumstances,

a class-action waiver may be unconscionable. See Muhammad, 912

A.2d at 97.

8 As the Third Circuit later explained when it received the

New Jersey court’s ruling in Delta Funding, the point of such

certifications is that they allow “federal courts to give the state

supreme courts an opportunity to elucidate an important issue of

state law, thereby avoiding erroneous predictions that will confuse

rather than clarify the issue.” Delta Funding v. Harris, 466 F.3d

273, 273 n.1 (3d Cir. 2006) (emphasis added).

\

~

-17-

If the Third Circuit actually followed the rule that T-

Mobile attributes to the Third Circuit—a rule that

categorically precludes any decision that a class-action

ban in an arbitration clause is unenforceable based on a

state-law determination of unconscionability—it would

have been pointless to have certified the class-action ban

issue to the New Jersey court in Delta Funding or to

analyze Virginia law in Gay, because the “AA would

have preempted a finding of unconscionability in any

event. See Kinkel, 857 N.E.2d at 260 (“If plaintiff's claim

is preempted by federal law, we need go no further in

our analysis of the class action waiver.”); Muhammad,

912 A.2d at 96 (“Because federal arbitration law does not

prevent us from examining the validity of the class-

arbitration waiver, we turn then to our state law

requirements in respect of contract unconscionability.”).

+ * +.

Given all of the above—the Third Circuit’s consistent

treatment of the unconscionability issue as one of state

law in cases such as Delta Funding; the hypothetical

nature of Gay’s discussion of Pennsylvania law; Gay’s

assumption that Pennsylvania law would, alone among

the states, insist on a “judicial class action”; the

abrogation of the lower-court decisions on which that

assumption was based; and Lowden’s distinction

between Washington law and Pennsylvania law as

depicted in Gay—the petition’s claim that Gay creates a

conflict on the question presented is wrong.

C. There Is No Broader Conflict of Federal Law

Concerning the Enforceability of Class-Action

Bans.

Absent any cases adopting its theory that the FAA

categorically precludes courts from holding class-action

bans in arbitration agreements unconscionable, T-Mobile

-18-

looks even further afield in an attempt to create a

conflict. The petition (at 3, 21-22) cobbles together two

distinct categories of cases from the Third, Fourth,

Seventh, and Eleventh Circuits in which those courts

enforced class-action bans, suggesting a broader conflict

over the enforceability of such provisions. What T-

Mobile fails to mention is that not one of those cases

actually decided the FAA preemption question

presented by the petition.

Four of the cases that T-Mobile cites, all of them pre-

Bazzle, did not involve state-law unconscionability

challenges at all, let alone the issue of federal preemp-

tion under the FAA. Instead, they decided the very

different question of whether a class-action ban may in

some circumstances conflict with the policies of a

particular federal remedial statute. See Livingston v.

Assocs. Fin. Inc., 339 F.3d 553 (7th Cir. 2003) (Truth in

Lending Act); Snowden v. Checkpoint Cashing, 290 F.3d

631 (4th Cir. 2002) (Truth in Lending Act and RICO);

Randolph v. Green Tree Fin. Corp., 244 F.3d 814 (11th

Cir. 2001) (Truth in Lending Act); Johnson v. West

Suburban Bank, 225 F.3d 366 (3d Cir. 2000) (Truth in

Lending Act). More recently, the First Circuit held that

a class-action ban was unenforceable because it

interfered with the plaintiffs’ ability to vindicate their

rights under the Clayton Antitrust Act, but the court

was careful to emphasize the differences between the

Antitrust Act and the Truth-in-Lending context in which

the earlier cases arose. See Kristian v. Comcast Corp.,

446 F.3d 25, 55-61 (1st Cir. 2006). No direct conflict has

yet emerged among these vindication-of-federal-rights

cases. In any event, even if a conflict were to emerge

within this line of cases, it would not implicate the

question presented in this case, which is whether federal

-19-

law precludes a state-law unconscionability challenge in

a case involving only state-law claims.

That leaves one last case cited by the petition as

evidence of a conflict: Jenkins v. First Am. Cash

Advance of Ga., 400 F.3d 868 (11th Cir. 2005). Jenkins,

like this case, did involve a state-law unconscionability

challenge to a class-action ban in an arbitration clause.

But far from adopting T-Mobile’s preemption theory,

Jenkins recognized that “(t]he FAA allows state law to

invalidate an arbitration agreement, provided the law at

issue governs contracts generally and not arbitration

agreements specifically.” Jd. at. 875. Applying Georgia

law, Jenkins concluded that there was no substantive

unconscionability in that case, particularly given the

ability of the plaintiffs to recover attorneys’ fees. Jd. at

877-78.

T-Mobile’s use of Jenkins to suggest that the law of

the Eleventh Circuit somehow conflicts with the decision

below is particularly misleading because the petition

omits a more recent Eleventh Circuit decision, authored

by the same judge, that squarely decided the question

presented. In Dale, 498 F.3d 1219, the Eleventh Circuit

held that the FAA did not preclude the court from

finding a class-action ban unconscionable under Georgia

law where the class-action ban happened to be found in

an arbitration agreement. Dale’s_ unconscionability

holding was based in part on the extremely limited

opportunity of the cable television subscribers in that

case to recover attorneys’ fees, making it “difficult for a

single subscriber to obtain representation” and

“allow[ing] Comeast to engage in unchecked market

behavior that may be unlawful.” Jd. at 1224.

At bottom, what the petition seeks to do is to trans-

form differing outcomes—based on differing facts,

-20-

differing contracts, and differing federal statutes or state

contract law—into a conflict of law. But no jurisdiction

has adopted a categorical rule negating all class- action

bans. The analysis is sensitive to the context, the facts,

and the differences in unconscionability doctrine among

the state courts. Outcomes necessarily differ. See

Muhammad, 912 A.2d at 24 (striking down class-action

ban based on a “fact-sensitive” assessment of uncon-

scionability); Delta Funding v. Harris, 912 A.2d 104, 115

(N.J. 2006) (in a decision issued the same day as

Muhammad, upholding a class-action ban in a case

involving large damages and explaining that “a class-

arbitration waiver in [an] arbitration agreement is not

unconscionable per se”).

As AT&T points out in its amicus brief, the differing

outcomes also turn on the way the arbitration clauses are

designed. In Jenkins and Dale, for example, the outcome

of the state-law analysis turned in part on the extent to

which plaintiffs could recover attorneys’ fees so that they

would have a meaningful ability to pursue individual

relief. Although T-Mobile suggested otherwise in the

court below, it is doubtful that the T-Mobile arbitration

agreement provides for the recovery of attorneys’ fees

where available under the applicable substantive law—a

fact that may make this case a particularly poor vehicle

to explore the question presented. See Br. of Amicus

AT&T 19-21. The fact that the T-Mobile agreement

represents an older generation of agreements, and that a

new generation of agreements, touted by their drafters

as more “consumer friendly,” has emerged, provides an

additional reason for refraining from deciding the

question presented in the context of this case. Review at

this time would not resolve any conflict among the

courts—because there is none—but would risk hindering

the natural evolution of both arbitration clauses and

md

class arbitration procedures. See Muhammad, 912 A.2d

at 24 (“Class arbitration is in its infancy and may provide

a fertile ground for establishing flexible class-action

procedures.”).

II. T-MOBILE’S CLAIM OF A CONFLICT WITH

THIS COURT’S PRECEDENT RESTATES

ITS MISGUIDED PREEMPTION THEORY,

WHICH HAS NOT BEEN ADOPTED BY ANY

COURT.

In closing, T-Mobile asserts that the decision below

“conflicts with this Court’s cases on the fundamental

relationship between the FAA and state-law substantive

and procedural policies.” Pet. 25. That assertion,

however, merely restates T-Mobile’s theory on the

merits of the preemption issue—a theory that has thus

far attracted no takers.

Indeed, T-Mobile’s categorical preemption theory

has been carefully considered and uniformly rejected

by the state and federal appellate courts in cases such

as Shroyer, 498 F.3d at 987-93; Discover Bank, 113

P.3d at 1110-17; Scott, 161 P.3d at 1008-09; Kinkel, 857

N.E.2d at 260-63; and Muhammad, 912 A.2d at 94-96.

These decisions address this Court’s cases on FAA

preemption (the same cases cited at pages 26-29 of the

petition), the FAA’s policy of ensuring that arbitration

agreements stand on an equal footing with all other

contracts, general principles of express and implied

federal preemption, and the generally applicable

nature of the state-law doctrine alleged to be

preempted. Neither T-Mobile’s dissatisfaction with the

consensus view of the state and federal courts, nor its

ability to invoke snippets of this Court’s cases to

support its argument, amount to a conflict warranting

29.

certiorari. See Gressman, Supreme Court Practice §

4.5 at 250 (noting that lawyers “are likely to regard

any case they have lost in a lower court as necessarily

in conflict with some Supreme Court decision or

doctrine” and that a “conflict must truly be direct” and

“readily apparent” to justify certiorari).

As T-Mobile acknowledges, the plain text of the FAA

makes arbitration agreements enforceable “save upon

such grounds as exist in law or in equity for the

revocation of any contract.” 9 U.S.C. § 2 (emphasis

added). This Court’s cases have consistently explained

that the FAA requires that arbitration clauses be placed

on an equal footing with all other contracts: “States may

regulate contracts, including arbitration clauses, under

general contract law principles” but they may not

discriminate against arbitration clauses. Casarotto, 517

USS. at 686. “[S]tate law, whether of legislative or judicial

origin, is applicable 2f that law arose to govern issues

concerning the validity, revocability, and enforceability

of contracts generally.” Perry v. Thomas, 482 U.S. 483,

491, 492 n.9 (1987) (emphasis in original). However, a

“state-law principle that takes its meaning precisely

from the fact that a contract to arbitrate is at issue does

not comport” with the FAA. /d.

The courts that have decided the question presented

have adhered scrupulously to these principles. See

Shroyer, 498 F.3d at 990 (“The California Supreme

Court in Discover Bank placed arbitration agreements

with class action waivers on the exact same footing as

contracts that bar class action litigation outside the

context of arbitration.”) (emphasis in original). As the

Washington Supreme Court explained in Scott, the FAA

“requires us to put arbitration clauses on the same

footing as other contracts, not make them the special

-23-

favorites of the law.” 161 P.3d at 1008 (emphasis in

original). Because the law of states such as Washington,

California, Illinois, and New Jersey with respect to

exculpatory clauses applies regardless of whether a

class-action ban is found in an arbitration agreement or

some other contract, it does not run afoul of the FAA:

“The arbitration clause is irrelevant to the unconscion-

ability.” Id. Exculpatory clauses “do not change their

character merely because they are found within a clause

labeled ‘Arbitration’.” Jd. Indeed, on the same day that it

issued its opinion in Scott, the Washington Supreme

Court, in another case, held unenforceable a forum

selection clause in a non-arbitration agreement that had

the effect of barring class actions. Dix v. ICT Group,

Inc., 161 P.3d 1016 (Wash. 2007).

Moreover, decisions such as Discover Bank, Scott,

and Shroyer do not hold that arbitration itself is

foreclosed unless the class-action ban is inseverable

from the arbitration agreement. Thus, they are

neutral as to whether classwide proceedings take place

in arbitration or in court—the answer depends on the

parties’ agreement. In this case, proceeding via

litigation rather than arbitration was T-Mobile’s own

choice. T-Mobile, not California law, determined that if

it could not enforce its class-action ban, it would prefer

to proceed in court.

In short, T-Mobile’s categorical preemption theory—

under which the FAA would preclude any state-law

determination that a class-action ban is unconscionable if

the class-action ban is contained in an arbitration

clause—is unprecedented. No court has adopted that

position, and nothing in this Court’s jurisprudence

requires such a sweeping displacement of generally

applicable state contract law.

24.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,

DEEPAK GUPTA

ScoTT L. NELSON

BONNIE I. ROBIN-VERGEER

PUBLIC CITIZEN

LITIGATION GROUP

1600 20th Street NW

Washington, DC 20009

(202) 588-1000

KIRK B. HULETT

(Counsel of Record)

DENNIS STEWART

HULETT HARPER STEWART

550 West C Street, Suite 1600

San Diego, CA 92101

(619) 338-1133

CRAIG M. NICHOLAS

MATTHEW B. BUTLER

NICHOLAS & BUTLER

255 Broadway, 19th Floor

San Diego, CA 92101

(619) 325-0492

Counsel for Respondent

April 25, 2008