State & Local Tax Blog

Class Action Suit Possible Avoidance Tactic

CCH reported on a case involving a mobile phone company has asked the U.S. Supreme Court whether a class action may proceed alleging that the company violated California law by charging sales tax on the full retail value of discounted wireless telephones. 

The action was filed by a consumer who purchased a phone from the company and entered into a written agreement to resolve disputes through individual arbitration. Despite the arbitration agreement, the consumer subsequently filed a suit in state court on behalf of herself and all similarly situated California consumers. The action was removed to federal court. The federal district court refused the company’s motion to compel arbitration and the U.S. Court of Appeals for the Ninth Circuit affirmed. The appellate court held that precedent compelled a finding that the arbitration agreement was unconscionable under California law and that state law is not preempted by the Federal Arbitration Act (FAA), 9 U.S.C. §§1-16.

It would be a good thing, IMHO, if having consumers sign agreements to resove disputes through arbitration, will prevent this class-action lawsuit abuse. Unfortunately, it appears that the arbitration clause will fail because CA says it’s unconscionable. For our client’s sake, I hope the Supreme’s take this case and compel the abitration. This will be interesting to watch.

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