Minnick v. Clearwire U.S. LLC

275 P.3d 1127

Certification from the United States Court of Appeals for the Ninth Circuit in Chad MINNICK, Linda Stephenson, Donald Schultz, Stephen Reimers, Corey Jelinski, Victoria Bartley, Christopher Cuhel, Karen Grefsrud, Rita McVicker, Josh Keller, Glenn Reynolds, and Eva Girod, on behalf of themselves and all those similarly situated, Plaintiffs–Appellants,

v.CLEARWIRE U.S. LLC, and Does 1 through 10, Defendants–Appellees.

No. 85810–1.

Supreme Court of Washington, En Banc.

May 3, 2012.

Felix G. Luna, Peterson Wampold Rosato Luna Knopp, Seattle, WA, Jonathan Tycko, Melanie Jenae Williamson, Tycko & Zavareei, LLP, Washington, DC, for Plaintiffs.

Kenneth E. Payson, Stephen Michael Rummage, Rebecca J. Francis, Davis Wright Tremaine LLP, Seattle, WA, for Defendants.

Mark Adam Griffin, Keller Rohrback LLP, Seattle, WA, Sean Donahue, San Francisco, CA, amicus counsel for National Consumers League.Kathleen M. O'Sullivan, Elvira Castillo, Perkins Coie LLP, Seattle, WA, Seamus C. Duffy, Susan M. Roach, Katie L. Bailey, Drinker, Biddle & Reath LLP, Philadelphia, PA, amicus counsel for Ctia-the Wireless Association.OWENS, J.

¶ 1 The United States Court of Appeals for the Ninth Circuit certified the following question:

Does Washington law treat the [early termination fee] at issue in this case as an alternative performance provision, or as a liquidated damages clause?

Minnick v. Clearwire U.S. LLC, 636 F.3d 534, 538 (9th Cir.2011) (hereinafter Order). This question is important because a liquidated damages provision is subject to a penalty analysis that an alternative performance provision avoids. The early termination fee (ETF) is a provision in a fixed-term telecommunications contract that charges customers a fee for terminating their contracts prematurely. Because the ETF, at the time of contracting, provided customers with a “real option” and was of relatively equal value with the alternative option of fulfilling the contract, we hold that it is an alternative performance provision and not a liquidated damages clause.

Facts and Procedural History

¶ 2 Clearwire provided wireless Internet and telephone services to the 12 subscribers (Appellants) who brought this case. Clearwire allows its users to access the Internet at broadband speeds from anywhere in the Clearwire coverage area simply by plugging in a wireless modem.

¶ 3 When signing up for this service, Clearwire's customers can choose between a month-to-month contract with no obligations beyond the monthly subscription charge and a fixed-term contract that has a discounted monthly subscription charge. Appellants all chose the fixed-term contract, for either one or two years. Those contracts allowed Appellants to cancel their subscription early by paying an ETF. The amount of the ETF varied depending on when the customer signed up and on whether the customer selected a one- or two-year contract. For customers who signed up before March 7, 2007, Clearwire charged a flat ETF of $180. For customers who signed up on or after March 7, 2007, Clearwire charged a diminishing ETF. The ETF started at $220 and was reduced by $5 for each month thereafter under a two-year contract or $10 for each month under a one-year contract. As for customers under the “ ‘Clear’ ” brand (as opposed to the “ ‘Clearwire’ ” brand), the ETF was $120 less $4 for each month thereafter. Id.

¶ 4 Consequently, depending on how much time is left on the contract, canceling early may cost more or less than the sum of the remaining monthly payments. Under the $120 ETF, the customer always saves more money by canceling early because the ETF is always less than the sum of the remaining monthly payments. For the $220 ETF that decreases by $5 a month, the ETF is greater than the remaining payments only in the last three months. The $180 flat ETF is greater than the remaining payments only during the last four months.

¶ 5 Appellants are all customers who either incurred this ETF for canceling early or were threatened with this ETF for attempting to cancel early. For example, Chad Minnick incurred the ETF after informing Clearwire that he was canceling his subscription early. Similarly, Donald Schultz initially tried to cancel his service but refrained upon learning he would be responsible for the ETF. Eventually, Schultz canceled anyway and paid the ETF when he moved outside of Clearwire's coverage area. In any event, all Appellants were dissatisfied with Clearwire's service, alleging that instead of the fast and reliable service promised, they received inconsistent and painstakingly slow speeds.

¶ 6 Minnick sued Clearwire in King County Superior Court in April 2009, claiming that Clearwire was committing false advertising and was imposing ETFs unlawfully. He then filed the first amended complaint in May, which added the other 11 plaintiffs through class certification. In July, Clearwire removed the case to the United States District Court for the Western District of Washington where it filed a motion to dismiss all of Appellants' claims. The district court granted Clearwire's motion.

¶ 7 Appellants then appealed to the United States Court of Appeals for the Ninth Circuit, arguing that the ETF was a liquidated damages provision and not an alternative performance provision as the trial court found. The Ninth Circuit believed the case involved an unsettled area of state law and certified the following question to this court: “Does Washington law treat the ETF at issue in this case as an alternative performance provision, or as a liquidated damages clause?” Order at 538.¹

¶ 8 We accepted the certified question pursuant to the Federal Court Local Law Certificate Procedure Act, chapter 2.60 RCW, and RAP 16.16.

Issue Presented

¶ 9 Is Clearwire's ETF an alternative performance provision or a liquidated damages provision subject to a penalty analysis?

Analysis

A. Standard of Review

¶ 10 “The decision whether to answer a certified question pursuant to chapter 2.60 RCW is within the discretion of the court.” Broad v. Mannesmann Anlagenbau, A.G., 141 Wash.2d 670, 676, 10 P.3d 371 (2000). This court treats the certified question as a pure question of law and reviews it de novo. See, e.g., Parents Involved in Cmty. Schs. v. Seattle Sch. Dist. No. 1, 149 Wash.2d 660, 670, 72 P.3d 151 (2003).

B. The ETF Is an Alternative Performance Provision

¶ 11 To determine whether the ETF is an alternative performance provision or a liquidated damages provision, we first analyze the issue under Washington law. However, because Washington case law has not specifically addressed ETFs in this context, see Chandler v. Doran Co., 44 Wash.2d 396, 267 P.2d 907 (1954); Bellevue Sch. Dist. No. 405 v. Bentley, 38 Wash.App. 152, 684 P.2d 793 (1984), we compare our analysis with that of other jurisdictions that have. Finally, we briefly address Appellants' argument that an alternative performance provision allows the promisee to recover only the option that results in the smallest recovery.

i. The ETF Is an Alternative Performance Provision under Washington Law

¶ 12 An alternative contract allows a promisor to render “ ‘one of two or more alternative performances either one of which is mutually agreed upon as the bargained-for ... exchange for the [other party's] return performance.’ ” Chandler, 44 Wash.2d at 401, 267 P.2d 907 (quoting 5 Arthur Linton Corbin, Corbin on Contracts § 1079, at 379 (1951)). By comparison, a liquidated damages provision is a sum of money agreed upon in advance that is a reasonable forecast of just compensation for the harm caused by breach. Walter Implement, Inc. v. Focht, 107 Wash.2d 553, 559, 730 P.2d 1340 (1987). If the liquidated damages provision is either not a reasonable forecast or if the harm is easy to ascertain, then the provision is an unlawful penalty. Id. Whether a contract provides for alternative performance or for liquidated damages is a question of factual interpretation that does not rely upon the form of words used by the parties. Bentley, 38 Wash.App. at 155, 684 P.2d 793. The distinguishing factor between the provisions is that the parties intended the options to give the promisor a real choice between reasonably equivalent choices. Chandler, 44 Wash.2d at 401, 267 P.2d 907.

¶ 13 This means that at the time fixed for performance either alternative might prove more desirable and that the parties did not intend the “device to assure the performance of the [other] option.” Id. at 401, 403, 267 P.2d 907. Additional factors to consider are “whether the money payment is equivalent to performance of the option, and the relative values of the performances.” Bentley, 38 Wash.App. at 156, 684 P.2d 793. The value of the options is determined at the time of contracting and not at the time the option is exercised. Id. In other words, whether a contract provides for an alternative performance or for a liquidated damages provision depends on whether (a) the contract gives the promisor a “real option,” and (b) there is a reasonable equivalence between the two choices.

¶ 14 Appellants reject this analytical framework, claiming that a true alternative performance contract would allow Appellants to choose between paying (1) the monthly payments and receiving Clearwire's services for the life of the fixed term or (2) the ETF and receiving Clearwire's services for the life of the fixed term. This is incorrect and is not supported by case law. So long as the ETF is a “ ‘specified payment’ ” that either nullifies the contract or allows Appellants to “ ‘regain the legal privilege of not’ ” performing, then an alternative contract can exist. Chandler, 44 Wash.2d at 402, 267 P.2d 907 (quoting 5 Corbin, supra, § 1213, at 883, 884); Bentley, 38 Wash.App. at 155–56, 684 P.2d 793 (same). Thus, despite Appellants' claims otherwise, the framework established in Chandler and Bentley applies here.

¶ 15 Under the Washington framework, the ETF at issue is an alternative performance provision and not a...