Bulk Text Messaging Suit Stayed for Arbitration

(CN) - A federal judge stayed conspiracy claims related to short codes and the application-to-person text messaging market, finding some issues suitable for arbitration.

In 2003, wireless carriers in the United States established a system of common short codes (CSC), five- or six-digit numbers that businesses and institutions could use to send wireless subscribers text messages in bulk. The service is known as application-to-person, or A2P, messaging.

Businesses interested in leasing short codes must sign a registrant sublicense agreement with Neustar, an entity with the exclusive right to issue and lease short codes, according to court filings.

In a federal class action last year, three lessees accused five of the six largest wireless service providers in the country, including AT&T, Verizon and T-Mobile USA, of monopolizing the CSC system and using it to inflate text messaging fees at the expense of consumers.

Trade association CTIA - The Wireless Association and Wireless Media Consulting (WMC), a Virginia-based corporation that provides CSC monitoring and compliance services to CTIA, were also named as defendants.

The lawsuit accused the carriers of using CTIA, which they control financially, to establish Neustar, the only entity that can issue short codes, and to make consumers send high-volume messages through a limited number of affiliates called "connection aggregators," so they can charge senders unnecessary fees at various levels.

According to the complaint, the defendants made a deal to bar A2P text message transmission from traditional 10-digit numbers, and required all lessees to transmit their A2P messages through aggregators, which charged exorbitant connectivity and per-message fees. The defendants also allegedly imposed unnecessary audits, conducted by Wireless Media Consulting, which further drove up messaging costs.

The plaintiffs, Club Texting, iSpeedbuy and TextPower, filed the lawsuit on behalf of thousands of short code lessees who had leased common short codes from Neustar after April 5, 2008, and had sent or received text messages through one or more aggregators.

CTIA, WMC and the wireless carriers argued that the claims were subject to arbitration, and asked the court to stay the lawsuit pending resolution of those claims.

U.S. District Judge Alison Nathan granted their request last week, rejecting claims that the defendants were not direct signatories of the agreement that contained the arbitration clause.

Nathan noted that the plaintiffs and putative class members had all signed the registrant sublicense agreement, a legally binding contract between nonparty Neustar and short code lessees. And although CTIA, WMC and the carriers had not signed the agreement themselves, they can enforce its arbitration provision against the plaintiffs as third-party beneficiaries.

"Plaintiffs' relationship with the carrier defendants, CTIA, and WMC is sufficiently close to justify estopping plaintiffs from denying their contractual obligation under the RS agreement to arbitrate disputes of this kind," Nathan wrote.

What's more, the plaintiffs' claims arise directly from the subject matter of the agreement, which implements the CSC system, sets the fees and costs, and establishes the audit system and the right to sanction violators, according to the 52-page opinion.

The fact that the plaintiffs have not included Neustar as a defendant to avoid enforcement of the arbitration clause also supports the defendants' theory, since the claims against them are identical to those that could have been raised against Neustar, according to the ruling.

Nathan also disagreed that the defendants' alleged misconduct blocked equitable estoppel, and ruled that only wrongful actions that relate to the arbitration agreement itself could bar its enforcement.

A challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must be decided by the arbitrator, the opinion states.

Club Texting and its co-plaintiffs failed to persuade the court that the arbitration clause was limited to claims under Virginia law.

The plaintiffs must also arbitrate claims against the individual aggregators based on arbitration clauses in service agreements, according to the ruling.

The plaintiffs had also argued that the costs of individually arbitrating the complex antitrust claims in the complaint would make access to arbitration impracticable, thus denying them "effective vindication."

But Nathan found no evidence that the filing fees and administrative costs would be so high as to deny the plaintiffs the right to pursue their claims.

The judge chose to stay - rather than dismiss - the nonarbitrable claims, per federal arbitration rules.

Washington, D.C., law firm Wiley Rein, which represents the carriers, called the decision "an important victory for the wireless industry."

Attorneys and representatives for the parties did not return requests for comment.

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