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TING v. AT & T

January 15, 2002

DARCY TING, ET AL., PLAINTIFFS,
V.
AT & T, DEFENDANT.



The opinion of the court was delivered by: Zimmerman, United States Magistrate Judge.

      FINDINGS OF FACT AND CONCLUSIONS OF LAW

In this action, defendant American Telephone and Telegraph Company ("AT & T") is being sued by its California customers for attempting to impose a new contract containing provisions which allegedly violate California contract and consumer protection laws.*fn1 The complaint was filed in Alameda County Superior Court the day before the new contract was to start taking effect. Defendant immediately removed the action to this court, invoking this court's jurisdiction pursuant to 28 U.S.C. § 1331 and 1332. Plaintiffs' motions for a temporary restraining order and for a preliminary injunction were denied. Following stipulation of the parties, this case was certified as a class action pursuant to Fed. Rule Civ. P. 23(a) & (b). Trial commenced on November 13, 2001. Having considered and weighed all the evidence and having assessed the credibility of the witnesses, I now make these findings of fact and conclusions of law as required by Fed. Rule Civ. P. 52(a).

A. THE PARTIES

1. Plaintiff DARCY TING is a California resident over the age of 18 residing in Berkeley, California. She is presently an AT & T long distance customer, and has been one since approximately 1994. She is employed as a community consumer advocate by plaintiff CONSUMER ACTION.

2. Plaintiff CONSUMER ACTION is a non-profit membership organization committed to consumer education and advocacy. Established in 1971, CONSUMER ACTION is incorporated in California with headquarters in San Francisco, and has approximately 1,500 members nationwide. CONSUMER ACTION is actively involved in policy and legislative advocacy on telephone and utility issues on behalf of consumers at both the state and national levels.

3. Defendant AT & T is a New York corporation with its principal place of business in Basking Ridge, New Jersey. It provides numerous telecommunications, information and other services to residential and business customers throughout the United States. As one example, AT & T offers interstate long distance telephone service to approximately sixty million residential consumers throughout the United States and approximately seven million residential consumers in California. AT & T has offices in California and elsewhere in which it does business related to its residential long distance service.

B. DETARIFFING BACKGROUND

5. The FCA permits a person harmed by a carrier to file a complaint with the FCC or to bring suit in district court for the recovery of damages. See 47 U.S.C. § 207. In interpreting the FCA's tariff requirements, the courts developed the filed rate doctrine which prohibited a regulated entity from charging rates "for its services other than those properly filed with the appropriate federal regulatory authority." Arkansas Louisiana Gas Co. v. Hall, 453 U.S. 571, 577, 101 S.Ct. 2925, 69 L.Ed.2d 856 (1981). The doctrine also prevented "an aggrieved customer from enforcing contract rights that contravene[d] governing tariff provisions or from asserting estoppel against the carrier." Fax Telecommunicaciones v. AT & T, 952 F. Supp. 946, 951 (E.D.N.Y. 1996). Because the rate making procedures and resulting tariffs were public documents, the consumer's knowledge of the published rate was presumed. Consequently, claims of carrier misrepresentation were barred, see AT & T v. Central Office Telephone, 524 U.S. at 222, 118 S.Ct. 1956 (citing Kansas City Southern R.R. Co. v. Carl, 227 U.S. 639, 653, 33 S.Ct. 391, 57 L.Ed. 683 (1913)), as were claims for breach of contract involving fraudulent carrier conduct relating to privately negotiated lower rates. See Wegoland, Ltd. v. NYNEX Corp., 27 F.3d 17, 22 (2d Cir. 1994). Although the doctrine sometimes led to seemingly harsh and unfair results, see Maislin Indus., U.S., Inc. v. Primary Steel Inc., 497 U.S. 116, 130-31, 110 S.Ct. 2759, 111 L.Ed.2d 94 (1990); Louisville & Nashville R.R. v. Maxwell, 237 U.S. 94, 97, 35 S.Ct. 494, 59 L.Ed. 853 (1915), courts left the enforcement of tariffs to the regulators, who were seen as best situated to determine whether the regulated entities were engaging in fraud or other illegal conduct. See Wegoland, 27 F.3d at 21.

6. After the decision in United States v. AT & T, 552 F. Supp. 131 (D.D.C. 1982), aff'd sub nom., Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983), in which AT & T was divested and the pay telephone operations of the Bell operating companies were separated from those of AT & T, a number of lawsuits were filed by consumers in response to business practices, such as slamming, that arose as carriers started competing to provide long distance telephone services. Notwithstanding the filed rate doctrine, the courts began to permit a number of these lawsuits, including a number of class action suits. See, e.g., Marcus v. AT & T, 138 F.3d 46, 62-63 (2d Cir. 1998) ("[A] suit for injunctive relief appears not to interfere with the nondiscrimination policy underlying the filed rate doctrine. . . . [I]f the appellants can establish the substance of their state and federal common law fraud claims, the filed rate doctrine would not bar them."); Gelb v. AT & T, 813 F. Supp. 1022, 1032 (S.D.N.Y. 1993) (filed rate doctrine inapplicable to a class action which alleged universal fraud and concealment of rates because the claim did not implicate the core concerns of the doctrine); Day v. AT & T; 63 Cal.App.4th 325, 331, 74 Cal.Rptr.2d 55 (1998) (filed rate doctrine does not apply to bar a class action seeking to enjoin misleading or deceptive practices under state consumer protection laws). See also cases cited infra ¶ 63.

7. In the Telecommunications Act of 1996, Congress directed the FCC to forbear from applying any provision of the FCA if the FCC found 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) (1996). One of the principal purposes in passing this Act was to "make it possible for the FCC immediately to forebear [sic] from economically regulating each and every competitive long-distance operator. . . ." 141 Cong. Rec. S7881-02, S7888 (1995). As Congressman Cox stated, deregulation would take the country out of the "regulatory thicket that has shackled the industry." Communications Law Reform: Hearings Before the Subcomm, on Telecommunications and Finance of the Comm. on Commerce House of Representatives, 104th Cong. 15 (1995). Senator Slade Gorton emphasized that the Act would allow:

States to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers, which are, of course, the precise goals of this Federal statute itself.

141 Cong. Rec. S8206-02, S8212 (1995) (emphasis added).

8. As part of deciding whether to forbear from enforcing § 203 of the FCA pursuant to this statutory authority, the FCC issued a series of notices and orders which established the FCC's intent to abolish the filed rate doctrine. In describing its preference for complete detariffing rather than permissive detariffing, the FCC stated:

Complete detariffing would also further the public interest by eliminating the ability of carriers to invoke the `filed-rate' doctrine. . . . In addition, complete detariffing would further the public interest by preventing carriers from unilaterally limiting their liability for damages. Accordingly, by permitting carriers unilaterally to change the terms of negotiated agreements, the filed rate doctrine may undermine consumers' legitimate business expectations. Absent filed tariffs, the legal relationship between carriers and customers will much more closely resemble the legal relationship between service providers and customers in an unregulated environment. Thus, eliminating the filed rate doctrine in this context would serve the public interest by preserving reasonable commercial expectations and protecting consumers.

Second Report and Order In the Matter of Policy and Rules Concerning the Interstate, Interexchange Marketplace, ("Second Report and Order"), 11 F.C.C.R. 20,730, ¶ 55, 1996 WL 633345 (1996). The FCC also stated that "[t]he public interest benefit of removing carriers' ability to invoke the `filed-rate' doctrine applies equally with respect to terms and conditions as to rates." Id. ¶ 155. Significantly, the FCC envisioned its own complaint procedures existing concurrently with judicial remedies in the new detariffing regime. "In the absence of such tariffs, consumers will not only have our complaint process, but will also be able to pursue remedies under state consumer protection and contract laws." Id. ¶ 42. The FCC noted that "in the absence of tariffs, consumers will be able to pursue remedies under state consumer protection and contract laws in a manner currently precluded by the `filed rate' doctrine." Id. ¶ 38.

9. AT & T filed a Petition for Limited Reconsideration and Clarification with the FCC in an attempt to resolve what it thought was an ambiguity in the Commission's position on whether the FCA would continue to govern the reasonableness of rates, terms and conditions of interstate service. The FCC granted in part and denied in part AT & T's petition, stating:

the [FCA] continues to govern determinations as to whether rates, terms, and conditions for interstate, domestic, interexchange services are just and reasonable, and are not unjustly or unreasonably discriminatory. [However,] we note that the [FCA] does not govern other issues, such as contract formation and breach of contract, that arise in a detariffed environment. 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.

Order on Reconsideration In the Matter of Policy and Rules Concerning the Interstate, Interexchange Marketplace ("Order on Reconsideration"), 12 F.C.C.R. 15,014, ¶ 77, 1997 WL 473330 (1997) (emphasis added).

10. The FCC finally determined, in a series of Orders upheld by the Court of Appeals for the District of Columbia Circuit, see MCI WorldCom v. FCC, 209 F.3d 760 (D.C.Cir. 2000), to exercise its forbearance authority under the Telecommunications Act of 1996 to end the practice of setting rates, terms and conditions through tariffs pursuant to the FCA. Instead, the FCC required long distance carriers to establish contracts with their residential long distance consumers that would govern the rates, terms, and conditions of interstate long distance service. The FCC initially set a date of January 31, 2001, for the mandatory "detariffing" of interstate domestic interexchange services, which it extended twice, first to April 30, 2001, then to July 31, 2001. Thus, beginning August 1, 2001, all long distance carriers had to form contracts with their existing long distance residential customers.

11. The FCC has posted a web page entitled "Detariffing Interstate Long Distance Telephone Service: What Customers Need to Know." It states in part:

What protections do I have, now that companies don't have to file anything with the FCC? You are protected by the full range of state laws, including those governing contract, consumer protection, and deceptive practices. For example, state contract law determines what constitutes an agreement between you and your long distance company. Where do I file a complaint if I have problems with my interstate long distance service company? You may contact your state consumer protection agency, Better Business Bureau, or State Attorney General Office to learn about the protections and remedies available under your state contract and consumer protection laws. You may also file a complaint with the FCC if an interstate long distance company has violated FCC rules.

(Pls.' Ex. 205-2.)

12. As a result of the FCC's decision to order detariffing, absent the contract provisions in dispute here, class members would have the same rights to sue AT & T in court as would any person doing business with AT & T, unless the suit is over a service governed by a tariff which survived detariffing, such as AT & T's "dial around" service.

C. AT & T'S RESPONSE TO DETARIFFING

13. To prepare to do business after detariffing, AT & T formed a detariffing team composed of dozens of individuals from several AT & T departments under the overall supervision of Louis Delery, Vice President for Consumer Long Distance Services. The team commenced work in the summer of 2000. AT & T eventually spent approximately $30 million to implement its detariffing obligation, which included the development of a standardized contract for use with its customers. AT & T called the contract the Consumer Services Agreement ("CSA").

14. AT & T decided in early 2000 to include in the CSA a series of provisions designed to limit the parties' rights and remedies in the event of a dispute. In the final version of the CSA, these provisions are contained in sections 4 and 7 (hereinafter, the "Legal Remedies Provisions").

15. For many years, AT & T has sponsored the AT & T Consumer Strategy and Issues Council ("AT & T Consumer Council" or "Council"). The Council is composed of consumer advocates and meets five to six times per year. Ken McEldowney, executive director of plaintiff CONSUMER ACTION, has served as Chair of the Council for the past several years, and has served on the Council for approximately fifteen years.

16. AT & T decided to include the Legal Remedies Provisions in the CSA before a draft was presented to the Consumer Council, and was not willing to change its decision regardless of how the Council reacted. In a series of internal e-mails, AT & T officials stated that "we owe the Council a response before we set things in stone. . . . [W]e want to gauge their reaction on what we're willing to change and what we're not — especially arbitration," (J. Ex. 39-1), and "[A]lthough the Consumer Panel had strong opinions against binding arbitration, Legal's recommendation was equally strong that it remains as a condition of the Service Agreement." (Pls.' Ex. 134-1.)

17. Drafts of the CSA, a cover letter to customers, and a set of Frequently Asked Questions ("FAQs") were discussed at two Consumer Council meetings, September 20, 2000, and April 5, 2001. Members of the Council, including Mr. McEldowney, expressed substantial concern about parts of the Legal Remedies Provisions such as the binding arbitration provision in the CSA, raised questions about the enforceability of portions of the Legal Remedies Provisions under California law, and raised concerns about the clarity of some portions of the CSA and a need for foreign-language translations.

18. These concerns were noted by AT & T. A memo entitled "Detariffing Briefing with Consumer Council, Wednesday, September 20, 2000," states in part:

Dispute Resolution — this component of the service agreement is very objectionable to the advocates. They have a philosophical aversion to the concept of mandatory arbitration as a means to satisfy consumer disputes. They were particularly troubled by the clause preventing customers from participating in class action suits against AT & T. One influential member threatened to resign from the council if we adopt this clause.

(J. Ex. 13-1.)

19. AT & T tried to justify to the Council the need for the Legal Remedies Provisions by referring to the costs associated with class action lawsuits. AT & T was asked to provide information regarding these costs and the burden they allegedly place on AT & T, but did not do so.

20. Members of the Consumer Council, especially Mr. McEldowney, objected to AT & T's desire to implement the CSA without requiring any affirmative assent from its customers — the so called "negative option."*fn2 While the Council suggested at least one alternative, AT & T determined to implement the CSA as a negative option. AT & T believed that a significant number of its customers would never affirmatively signify their assent to the CSA, that any process designed to obtain individualized informed consent to legal services would be very expensive, and that no such process was likely to produce a response from all or most of AT & T's approximately sixty million residential long distance consumers.

21. AT & T's acceptance of the Council's input was limited to the means by which the Legal Remedies Provisions were communicated to AT & T's customers, rather than the substance of the provisions themselves. For example, AT & T improved some of the contract language, though the language of the Legal Remedies Provisions remained substantially the same, and translated the contract documents into other languages.

22. AT & T conducted market research to assist it in developing the contract documents. One part of AT & T's research, the Quantitative Study, included the following key findings and recommendations:

In the letter it should be made clear that this agreement is being sent for informational purposes only. The fact that no action is required on the part of the customer needs to be made. [sic] A strong link establishing that this information is not a `call to action' on the part of the customer should be clearly stated in the letter. . . . Customers should understand that the mailing is being sent to comply with a federal mandate and does not imply any change in their relationship with AT & T.

(J. Ex. 10-6.)

23. Another part of AT & T's research, the Qualitative Study, concluded that after reading the bolded text in the cover letter which states "[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," "[a]t this point most would stop reading and discard the letter." (J. Ex. 9-9.) One of the authors of the study did not find this conclusion to be a cause of concern, and no one on the detariffing team ever expressed concern to her about this conclusion.

24. On the contrary, AT & T was concerned that if its customers focused on the Legal Remedies Provisions, they might become concerned, less likely to perceive detariffing as a non-event and possibly defect. As a high ranking member on the detariffing team stated: "I don't want them to tell customers that now individual contracts need to be established with customers and pay attention to the details [sic]." (Pls.' Ex. 132-1.) While presenting the CSA as a non-event may have helped AT & T retain its customers, it also made customers less alert to the fact that they were being asked to give up important legal rights and remedies.

D. AT & T'S MAILING OF THE CSA

25. Between May 2 and June 9, 2001, AT & T mailed the CSA, a cover letter, and the FAQs to approximately eighteen million of its residential long distance customers whom it bills directly by including these materials in the envelope that contained the customer's bill (hereinafter, the "billing mailing"). No statement regarding the CSA appeared on the outside of the envelope. The CSA, cover letter and FAQs are attached at the end of these findings and conclusions as "Attachments 1-3," respectively.

26. The billing mailing was highly likely to be opened. However, a reasonable class member would not have expected the billing statement to contain a new contract, and therefore might well have discarded the CSA as a stuffer. A class member would have been more likely to read the CSA had the envelope stated that a new contract was included with the bill, which AT & T did not do.

27. To its remaining forty-two million residential long distance customers, AT & T mailed the CSA, a cover letter and the FAQs in a separate envelope (hereinafter, the "separate mailing"). On the outside of this envelope appeared the statement: "ATTENTION: Important Information concerning your AT & T service enclosed." This envelope is attached at the end of these findings and conclusions as "Attachment 4." A substantial number of class members did not open the separate mailing and therefore were unaware, as they continued to use their service, that AT & T would consider that they had agreed to a new contract. AT & T's Quantitative Study had concluded that approximately 1/4 of its customers "are not even likely to open the [separate mailing]." (J. Ex. 104.) AT & T's Quantitative Study had found that approximately 10% of its customers would not even skim or glance at the CSA contained in the separate mailing, and only 30% of its customers would actually read the entire CSA. This is consistent with plaintiffs' research presented in the Lake-Snell survey.

28. The Lake-Snell survey commissioned by plaintiffs concluded that the vast majority of class members had either not opened or not read the CSA. However, this survey is flawed at least with respect to the absence of screening procedures to determine whether survey participants were AT & T residential long distance customers, and if they were, whether they were the household member who would have dealt with a mailing from AT & T. (Pls.' Ex. 209-7-9, Questions 1, 4-5, 9, 14-15.) With regard to the participants that actually received and read the CSA, the survey is helpful and discloses the expectation of many consumers that before they can be bound to a contract they must in some affirmative fashion manifest their voluntary assent. (Id., Questions 6-8, 10, 12-13.) While I attached less weight to the responses to questions 2-3 and 11, since the form of the questions could have been improved, I could not ignore the clear trend of these answers, which indicate that people are unlikely to read solicitations received in the mail, even if from AT & T. Nor could I ignore their consistency with the results of AT & T's research.

30. From the perspective of affecting a person's legal rights, the most effective communication is generally one that is direct and specific. In this case, that would have been to boldly place on the separate mailing envelope at least the message that a new contract was enclosed rather than the generic "Important Information" notification.

31. During July 2001, plaintiff DARCYTING received in the mail from AT & T and opened and read the "separate mailing." Prior to receiving this mailing, plaintiff TING was not aware of the obligation that AT & T or other long distance carriers had to establish a contract with their residential customers. She was not expecting to receive a mailing from AT & T concerning the CSA or detariffing.

32. In the summer of 2001, most class members did not expect to receive a new contract from AT & T, let alone one which could be accepted by performance. Class members, like any consumers in an ongoing relationship with a business, have a reasonable expectation that material changes to the relationship will be communicated to them. AT & T's methods of communicating the new CSA downplayed the material changes presented by the Legal Remedies Provisions.

33. Of the people who opened either mailing, a substantial number likely did not read it at all and a larger number did not read it thoroughly. This was exacerbated by the message in the documents that the customer would not have to do anything upon their receipt and by AT & T's overall message of reassurance to its customers that detariffing was a "non-event." The cover letter introduced the concept of assent by non-action by bolding the statement: "Please 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."

34. The CSA was an offer which by its terms could be accepted without anyone needing to sign and return a document. According to the second paragraph of the CSA:

BY ENROLLING IN, USING, OR PAYING FOR THE SERVICES, YOU AGREE TO THE PRICES, CHARGES, TERMS AND CONDITIONS IN THIS AGREEMENT. IF YOU DO NOT AGREE TO THESE PRICES, CHARGES, TERMS AND CONDITIONS, DO NOT USE THE SERVICES, AND CANCEL THE SERVICES IMMEDIATELY ...

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