It was reported this week that an arbitrator at the American Arbitration Association certified a plaintiff class of 70 million Verizon Wireless subscribers challenging the $175 early termination fee in their customer agreement. Plaintiffs argue that the fee is an unenforceable penalty provision.
Verizon's customer agreement contains a prohibition on class action lawsuits, which the arbitrator found unenforceable. The result is the opposite of that reached in another lawsuit against Verizon, O'Quin v. Verizon Wireless, 256 F. Supp. 2d 512 (M.D. La. 2003), which found that Verizon's arbitration clause was not unconscionable despite its ban on class actions.
The ruling is a reminder that mandatory arbitration clauses prohibiting class actions can sometimes be ineffective, depending on the jurisdiction and factual circumstances. It also provides a reminder that liquidated damages clauses in contracts should be carefully drafted in a manner that will not be construed as a penalty provision.