Hesse v. Sprint Corp.

• Citation: 598 F.3d 581
• Decision Date: 10 March 2010
• Docket Number: No. 08-35235.,08-35235.
• Parties: Christopher W. HESSE; Nathaniel Olson, Plaintiffs-Appellants, v. SPRINT CORPORATION, a foreign corporation, Defendant, and Sprint Spectrum LP, doing business as Sprint PCS, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

598 F.3d 581

Christopher W. HESSE; Nathaniel Olson, Plaintiffs-Appellants, v. SPRINT CORPORATION, a foreign corporation, Defendant, and Sprint Spectrum LP, doing business as Sprint PCS, Defendant-Appellee.

No. 08-35235.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 5, 2009.

Decided March 10, 2010.

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David Elliot Breskin and Daniel Foster Johnson (argued), Breskin Johnson &amp Townsend PLLC, Seattle, WA; Bradley Jerome Moore and Ray W. Kahler, Stritmatter Kessler Whelan Coluccio, Seattle WA, for the plaintiffs-appellants.

Gavin W. Skok and David Brenner, Riddell Williams, PS, Seattle, WA; Robert Bruce Allensworth, Brian M. Forbes, Ryan M. Tosi, and Andrew Glass (argued), Kirkpatrick & Lockhart Preston Gates Ellis LLP, Boston, MA, for the defendant-appellee.

Appeal from the United States District Court for the Western District of Washington, John C. Coughenour, District Judge, Presiding. D.C. No. 2:-6-cv00592-JCC.

Before: ARTHUR L. ALARCON ANDREW J. KLEINFELD and RICHARD R. CLIFTON, Circuit Judges.

CLIFTON, Circuit Judge:

This case requires us to consider whether a broad release of claims in a nationwide settlement agreement between Sprint and its customers precludes the present class action involving a Washington state tax that Sprint invoiced to its Washington customers. That nationwide settlement arose out of a lawsuit that challenged Sprint's billing of customers for certain federal regulatory fees. Because we conclude that the Washington Plaintiffs' interests were not adequately represented in the prior action and that their claims are not "based on the identical factual predicate as that underlying the claims in the settled class action, " Williams v. Boeing Co., 517 F.3d 1120, 1133 (9th Cir.2008), we hold that the prior settlement did not release the claims at issue in this case, and we vacate the district court's grant of summary judgment in favor of Sprint,

I. Background

The State of Washington imposes a business and occupation tax ("B & 0 tax") on every person engaged in business activities in the state. Wash. Rev.Code § 82.04.220. Washington law specifies that the B & 0 tax must be collected from a business as part of its "operating overhead" rather than imposed as a separate "tax[ ] upon the purchasers or customers." Id § 82.04.500 (the "B & O Tax Statute"). It is alleged that Sprint passed the tax directly to its customers as a separate line item labeled "Washington State B & O Tax Surcharge" starting in April 2001.

Christopher Hesse and Nathaniel Olson ("the Washington Plaintiffs") filed separate class actions in Washington state courtalleging violations of the B & 0 Tax Statute and the Washington Consumer Protection Act ("CPA"), Wash. Rev.Code § 19.86.030, as well as common law breach of contract and unjust enrichment. Sprint removed both cases to the United States District Court for the Western District of Washington pursuant to 28 U.S.C § 1441(a).

The district court dismissed all claims predicated on the B & 0 Tax Statute as preempted by the Federal Communications Act ("FCA"), 47 U.S.C. § 332(c)(3)(A), but denied Sprint's motion to dismiss insofar as it related to "Plaintiffs' other contract and CPA claims." The district court then certified a class of "all current and former Washington state wireless service customers of Sprint, who have been charged and paid to Sprint a 'Washington State B & 0 Tax Surcharge'" with the Washington Plaintiffs as class representatives.

After filing its answer to the Washington Plaintiffs' consolidated complaint, Sprint moved for summary judgment, arguing for the first time that the suit was barred by a class settlement between Sprint and its customers approved by a Kansas state court in 2006 (the "Benney Settlement").

The Benney Settlement resulted from several class actions filed in 2002 in various state courts and then dismissed and refilled in Kansas state court in 2005 for purposes of settlement. One of those class actions was initiated in Missouri by Greg Benney (the "Benney Class Plaintiff"), who alleged that Sprint's surcharges to recoup federal regulatory fees violated consumer protection laws, represented a breach of contract, and resulted in unjust enrichment. The relevant regulatory fees were defined in the settlement agreement to include only specified fees imposed to recover the cost of compliance with federally mandated programs.¹ The Benney class was defined to consist of "all current and former Sprint wireless customers in the United States who were customers for any time during the period December 1, 2000 to the Effective Date[of the settlement in late 2006] and who were charged Regulatory Fees (as defined in [the Benney Settlement])." It is not disputed that the named plaintiffs in the case before us were members of the Benney class and that they did not opt out.

Sprint settled with the nationwide plaintiff classes, including the Benney class, in February 2006. The settlement provided various benefits, including phone cards and invoice credits on future bills, to members of the various subclasses of the Benney class who submitted claim forms. Sprint agreed, in a paragraph titled "Injunctive Relief as to Billing and Advertising Practices Related to the Regulatory Fees, " to disclose for at least two years that the regulatory fees and other surcharges to recoup the cost of compliance with govern-ment programs are "not taxes or government mandated charges." The term of the Benney Settlement relevant to Sprint's defense in the present case is Paragraph 22(a)(1), which purported to release Sprint from a set of potential claims much broader than the surcharges for federal regulatory fees that were the subject of the Benney action:

any and all claims... that have been, could have been, or in the future might be asserted in the[Benney] Action[ ] or in any other court or proceeding which relate in any way to allegations that... [Sprint] failed properly to disclose or otherwise improperly charged for surcharges, regulatory fees or excise taxes, including but not limited to the Regulatory Fees; and all other causes of action... whether based on federal, state, or local statute... that have been, could have been, may be, or could be alleged or asserted by any Class member... against [Sprint] relating to... the subject matter of any of the claims alleged in the Benney Action.

The Kansas court granted final approval of the Benney Settlement in November 2006. That order incorporated the settlement's release by reference and included its own expansive release of liability.²

The district court granted Sprint's motion for summary judgment in the present case based on these broad releases of liability.³

II. Discussion

A. Federal Preemption

We start with the district court's dismissal of the claims based on violations of the B & 0 Tax Statute. The district court held that the Washington state law was preempted by a provision of the FCA decreeing that "no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service." 47 U.S.C. § 332(c)(3)(A). Our court subsequently held, to the contrary, that the B & 0 Tax Statute does not regulate "the rates charged" but only "the method of disclosure" and is thus not preempted by the FCA. Peck v. angular Wireless, LLC, 535 F.3d 1053, 1058 (9th Cir.2008). We therefore vacate the district court's Amended Order dated February 13, 2007, which dismissed the Washington Plaintiffs' claims for violations of the B & O Tax Statute.

B. The Benney Settlement

We turn next to the district court's grant of summary judgment on the ground that the Washington Plaintiffs' claims were released by the Benney Settlement. We review the district court's grant of sum-mary judgment de novo. United States v Milner, 583 F.3d 1174, 1182 (9th Cir.2009).

Sprint argues that the Washington Plaintiffs' claims in this case fall within the broad release of liability in the Benney Settlement because they are "claims that... could have been... asserted... in [anjother court or proceeding which relate... to allegations that... [Sprint] failed properly to disclose or otherwise improperly charged for surcharges, regulatory fees or excise taxes...." If this release were to operate according to that interpretation, the Washington Plaintiffs would have no recourse for their surcharge-related claims in federal court because "[c]laim preclusion in federal court can be based on a state court settlement." Howard v. America Online, Inc., 208 F.3d 741, 748 (9th Cir.2000). We conclude, however, that the release cannot preclude the Washington Plaintiffs' claims because the Benney Class Plaintiff did not adequately represent the Washington Plaintiffs and because the Washington Plaintiffs' claims are based on a set of facts different from those underlying the claims settled in the Benney Settlement. For these two independent reasons, we vacate the district court's order granting summary judgment.

1. Collateral Review

At the threshold, Sprint contends that we may not inquire into the adequacy of representation in the Benney action because such an inquiry is an impermissible collateral attack on the Kansas court's judgment. The Full Faith and Credit Act generally requires us to afford the "judicial proceedings" of any State "the same full faith and credit... as they have by law or usage in the courts of such State" as determined by the rules of the State. 28 U.S.C. § 1738; see Matsushita Elec Indus. Co. v. Epstein, 516 U.S. 367, 373 116 S.Ct. 873, 134 L.Ed.2d 6 (1996). But a state court's power to declare the preclusive effect of its judgments is not without limit: "A State may not grant preclusive effect in its own courts to a constitutionally infirm judgment, " and we are "not required to accord full faith and credit to such a judgment." Kremer v. Chem. Constr. Corp., 456 U.S. 461, 482, 102 S.Ct....