Opinion ID: 2498554
Heading Depth: 2
Heading Rank: 2

Heading: Clearwire's ETFs Are Liquidated Damages

Text: ¶ 41 Applying the principles stated in Chandler and the treatises upon which it relies, I would hold the ETF provisions in this case are more like liquidated damages than an alternative performance option. First, the contract allows the same ETF to be imposed unilaterally by Clearwire upon either termination of the contract by the customer or breach by the customer. A fee imposed upon breach is by definition a liquidated damages provision. 24 Samuel Williston & Richard A. Lord, A Treatise on the Law of Contracts § 65:7, at 263 (4th ed. 2002) (a liquidated damages provision provides for an agreed result to follow from nonperformance). Clearwire wants it both ways; when challenged by a customer, the ETFs are alternative performance provisions, but when imposed by Clearwire for breach, they are liquidated damages. ¶ 42 The problem is not solved by Clearwire's argument that it did not impose an ETF for breach in this particular case. Br. of Def./Appellee Clearwire US, LLC, at 36-39. Given that our goal is to determine whether Clearwire's contract contains a true alternative promise, examining the actual terms of the contract is the best way to determine the true nature of the ETF. Under the actual terms of the contract, the ETF can be imposed unilaterally by Clearwire upon a breach of the contract; this fact tips the scales heavily toward liquidated damages. ¶ 43 Second, when both alleged alternative performances in a contract are the payment of money, and one is a payment of a lump sum to escape further payments under the contract, common sense dictates that the lump sum is a liquidated damages provision. There is no meaningful difference between a customer terminating the contract and the customer simply ceasing to pay its agreed monthly payments, and thus breaching the contract. See Mau v. L.A. Fitness Int'l, LLC, 749 F.Supp.2d 845, 849 (N.D.Ill.2010) (holding that such a situation would more fairly be classified as nonperformance . . . rather than alternative performance). In either instance, Clearwire would charge an ETF, and in either instance, the ETF is best classified as a liquidated damages provision. ¶ 44 Third, one of the defining characteristics that distinguishes alternative performance from liquidated damages is that [i]n an alternative contract, either of two performances may be given by the promisor and received by the promisee as the agreed exchange for the return performance by the promisee. 24 Williston, supra. This hews closely to the definition from Corbin we relied on in Chandler: `two or more alternative performances either one of which is mutually agreed upon as the bargained-for equivalent given in exchange for the return performance by the other party.' Chandler, 44 Wash.2d at 401, 267 P.2d 907 (quoting 5 Corbin, supra ). The ETFs in this case do not match either of these definitions. For one thing, the contracts are not mutually agreed upon in a bargained-for exchange. They are boiler plate adhesion contracts presented in take-it-or-leave-it form. More importantly, the alternatives are not given in exchange for a single return performance. The point of the alternative is that the promisor may choose which performance to give in exchange for the same consideration. Id. Clearwire's customers do not receive a year of service in exchange for either the ETF or their monthly payments. If customers end up paying the ETF, they get literally nothing in exchange. ¶ 45 Fourth, a true alternative performance looks to a continuation of the relationship between the parties, rather than to its termination. 24 Williston, supra. That is manifestly not the purpose of the ETFs in this case. The ETF is imposed upon termination of the relationship. That sounds more like a liquidated damages provision, which provides for an agreed result to follow from nonperformance. Id. ¶ 46 Fifth, an alternative contract must present a real option; in other words, the values of the two performance options must be relatively equal. Chandler, 44 Wash.2d at 404, 267 P.2d 907. Contrary to Clearwire's assertions, the ETF is not relatively equal to the monthly payments. For several months, the ETF is more expensive than the remaining payments on the contract. We have said that a real option exists where, ` at the time fixed for performance, either alternative might prove the more desirable.' Id. at 401, 267 P.2d 907 (emphasis added) (quoting 3 Williston, supra ). In the last few months, the ETF can be significantly more expensive than the monthly payment, and thus at the time fixed for that performance, the ETF could never prove more desirable. ¶ 47 Moreover, there is a serious flaw in Clearwire's reasoning on this point. The ETF is not paid as an alternative in exchange for Clearwire's service. Instead, the customer pays the ETF and receives no Internet service in exchange. As discussed above, that alone should be enough to convince the court that this is not a true alternative contract. But it also skews the value calculations. A customer terminating the contract will have not only paid the monthly fee for Internet service up to the point of termination, but also the ETF. Under Clearwire's reasoning, a customer that cancels in the first month and pays the ETF is exercising a real option because the ETF is so much cheaper than the remaining payments. But it seems that the customer's real option in that instance results in paying both the monthly fee and the ETF (around $220) for one month of Internet service. ¶ 48 It is true that some of the treatises use language suggesting that some alternative performance provisions can be the agreed price of the privilege of not performing the promise. 11 Joseph M. Perillo, Corbin on Contracts: Damages § 58:18, at 508 (rev. ed. 2005). But even then, an alternative performance operates as the full performance by the promisor of the agreed exchange for what may have been promised in return. Id. at 509. Clearwire's ETFs are not true alternative performance provisions under this rubric. ¶ 49 Moreover, courts examining this question must determine whether the parties actually bargained for an option. . . . If the clause was inserted at the request of the party who wishes to discharge the contract by payment, it is likely that an option was intended. Id. at 505 (emphasis added) (footnote omitted). Our case law agrees with this assessment. In upholding the provision as an alternative one in Chandler, we said: From the pleading, it appears that the parties conducted lengthy negotiations before the oral agreement was reached. It also is apparent that the transaction was one of considerable magnitude, and of such a nature that a decision to buy or sell could not be reached by either of the parties without thorough study. Chandler, 44 Wash.2d at 403, 267 P.2d 907. The sophistication of the parties and the thought that went into the contract was plainly an important factor in our one decision on alternative contracts. ¶ 50 The contract at issue here is of an entirely different character. It was written by Clearwire's attorneys and presented as a click-through contract on line. I urge the members of this court to consider the last time they clicked I agree on a software update. This is a similar contract of adhesion to which all users must agree. ¶ 51 Finally, the case law from other jurisdictions supports the claim that the ETFs are liquidated damages. Mau is a case nearly indistinguishable from this one, except that the contract was not a click-through on line contract. Mau, 749 F.Supp.2d at 847. There, the court held a termination fee in a gym contract was not an alternative performance provision. Id. at 849. Its reasoning makes such sense in light of this case that it is worth quoting extensively: Fundamentally an alternative-performance analysis is conducted in response to the suggestion of an attempt to disguise a provision for a penalty that purports to make payment of the amount an alternative performance under the contract (Restatement (Second) of Contracts § 356 cmt. c (1981) (hereafter cited simply cmt. c)). As River E. [ Plaza, LLC v. Variable Annuity Life Ins. Co. ], 498 F.3d [718,] at 722 [(7th Cir.2007)], quoting cmt. c, says: [A] court will look to the substance of the agreement to determine whether . . . the parties have attempted to disguise a provision for a penalty that is unenforceable.. . . In determining whether a contract is one for alternative performances, the relative value of the alternatives may be decisive. Of course the underlying question is whether [a] clause is punitive in nature ( id. ). Courts should expect to find non-punitive forms of alternative performance clauses, as opposed to traditional liquidated damage clauses, where the primary object of an alternative contract is performance, and it thus looks to a continuation of the relationship between the parties, rather than to its termination (24 Williston on Contracts § 65:7 (Richard Lord, ed., 4th ed. 2010)). This exposition of the alternative-performance analysis makes clear that such an analysis is not really applicable here. First, by definition there was and is no expectation of a continuing relationship between Mau and Fitnessexactly the opposite is true. Mau simply wanted to end his contract with Fitness and presumably find another place to work out, if he chooses to continue to do so. Surely the situation can more fairly be classified as nonperformance (indeed, nonperformance by Fitness rather than by Mau, when his version is credited as it must be on the current motion), rather than alternative performance. Id. at 848-49 (some alterations in original). Here, assuming the facts most favorable to the parties appealing from the grant of a motion to dismiss, the situation is nearly identical, right down to the nonperformance being on the part of Clearwire rather than the appellants. [3] ¶ 52 In In re Cellphone Termination Fee Cases, 193 Cal.App.4th 298, 122 Cal.Rptr.3d 726, cert. denied, ___ U.S. ___, 132 S.Ct. 555, 181 L.Ed.2d 397 (2011), the California Court of Appeals held that ETFs imposed by Sprint were not alternative performance provisions. It stated that Sprint adopted ETFs after studying the concept of term contracts with ETFs as a means to reduce its [rate of customers discontinuing service], and tested use of ETFs in selected markets. Id. at 306, 122 Cal.Rptr.3d 726. [4] The case had a different procedural posture than this one because the trial court had already held the ETFs were not an alternative performance provision and that finding was challenged on appeal. Id. at 329, 122 Cal.Rptr.3d 726. It also had a somewhat different factual posture because Sprint had imposed the fees mostly as a response to actual breaches by customers. Id. at 328, 122 Cal.Rptr.3d 726. Nevertheless, the court cited favorably the trial court's observations that the ETF provisions `did not give the customers a rational choice of paying the ETF or completing the contract,' because the language of the ETF provision permitted Sprint to impose the fee on customers involuntarily. Id. (quoting the trial court). ¶ 53 The undisputed language in Clearwire's contracts permits Clearwire to impose the fee involuntarily. Just like Clearwire, Sprint argued that the value of the two options was relatively equal: Sprint argues that the trial court erred in judging the economic function of the ETF and choice it provided customers after the contract had either been performed or breached, and that it should instead have judged the choice the ETF provided customers at the outset of the contract. ( Blank v. Borden (1974) 11 Cal.3d 963, 971, 115 Cal.Rptr. 31, 524 P.2d 127 [(1974)] [arrangement viewed from the time of making the contract]). But, as Plaintiffs respond, the service agreements provided from the inception of the contract that an ETF could be triggered involuntarily by Sprint, confirming that at the time of contracting the provision was not understood or intended as providing only for a rational choice of the customer. Id. at 329, 122 Cal.Rptr.3d 726 (emphasis added). Clearwire's contracts at the time of contracting also provided that Clearwire could unilaterally impose the ETF. It is no more plausible in this case that Clearwire's ETFs were understood as or intended to provide only for a rational choice.