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From Antitrust Law Daily, December 14, 2015

DIRECTV arbitration provision enforceable

By Jody Coultas, J.D.

A California appellate court erred in refusing to enforce an arbitration provision in DIRECTV’s customer contracts, according to a divided U.S. Supreme Court. In an opinion written by Justice Stephen Breyer and joined by five other justices, including the chief justice, the appellate court’s ruling was found to be inconsistent with the Federal Arbitration Act (FAA). The lower court decision was reversed, and the matter remanded so that the appellate court may enforce the arbitration agreement (DIRECTV, Inc. v. Imburgia, December 14, 2015, Breyer, S.).

Satellite television subscribers claimed that DIRECTV was liable for false advertising and violations of the California Consumer Legal Remedies Act and the Unfair Competition Law. The customer contract stated that the parties waived their rights to bring class claims and that if “the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire Section 9 is unenforceable.” Although the agreement stated that Section 9 was governed by the FAA, Section 9 stated that the specific issue of the enforceability of the class action waiver shall be governed by “the law of your state.”

A California appellate court denied DIRECTV’s motion to stay or dismiss the claims and to compel arbitration. The court found that because California law prohibited enforcement of class arbitration waivers, the entire arbitration provision was unenforceable under the agreement. The phrase “law of your state,” according to the court, was both a specific provision that should govern more general provisions and an ambiguous provision that should be construed against the drafter.

DIRECTV, in its petition for certiorari, asked the High Court to determine whether the lower court’s ruling created a conflict with the Ninth Circuit and ran contrary to the holding in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

Interpretation of a contract is a matter of state law. Although the parties likely believed that the words “law of your state” included California law that made class-arbitration waivers unenforceable, the underlying question of contract law at the time the Court of Appeal made its decision was whether the “law of your state” included invalid California law. The High Court therefore was required to determine whether finding that the “law of your state” included invalid California law was consistent with the FAA.

Because the interpretation of the phrase “law of your state” did not place arbitration contracts “on equal footing with all other contracts” and did not give “due regard . . . to the federal policy favoring arbitration,” the ruling was reversed. Absent any indication in the contract that the language referred to invalid state law, it presumably referred to valid state law. Under “general contract principles,” references to California law incorporated the California legislature’s power to change the law retroactively. The appellate court did not explain why parties might generally intend the words “law of your state” to encompass invalid state law. Rather, the contract referred to state laws that make the waiver of class arbitration unenforceable, while an invalid state law would not make a contractual provision unenforceable.

Even assuming that the appellate court’s reasoning was a correct statement as to the meaning of “law of your state” in this arbitration provision, the Court could not find that the opinion suggesting that California would generally interpret “law of your state” would include invalid state laws because they conflict with federal laws. The appellate court’s conclusion reflected the subject matter at issue, rather than a general principle that would apply to contracts using similar language but involving state statutes invalidated by other federal law. The appellate court could have meant that its holding was limited to the specific subject matter of arbitration.

The appellate court’s interpretation of the arbitration contract was unique and restricted to that field, according to the Court. The view that a state law retained independent force even after it was invalidated by Concepcion was one courts were unlikely to accept and apply in other contexts. California courts would not interpret contracts other than arbitration contracts the same way. Also, the appellate court did not reference any principle suggesting that California courts would reach the same interpretation of the words “law of your state” in other contexts.

Ginsburg dissent. Justice Ruth Bader Ginsburg, joined by Justice Sonia Sotomayor, dissented from the majority’s opinion because it left consumers “without effective access to justice.” The Court “expanded the scope of the FAA, further degrading the rights of consumers and further insulating already powerful economic entities from liability for unlawful acts,” according to Justice Ginsburg.

The consumers originally filed suit arguing that DIRECTV’s early termination fees violated California consumer protection laws. DIRECTV did not initially seek to stop the lawsuit and compel bilateral arbitration. At the time the suit was filed, California law rendered class action bars per se unenforceable as unconscionable. Three years into the litigation, the Court in Concepcion found that the FAA preempted state rules that rendered class arbitration bans unenforceable. DIRECTV then moved to enforce the arbitration provision.

The dissent stated that this was the first time the Court reversed a state court decision on the ground that the state court misapplied state contract law when it determined the meaning of a term in a particular arbitration agreement.

The appellate court appropriately applied state contract law to interpret DIRECTV’s reference to the home state laws of its customers, according to the dissent. The FAA requires courts to honor parties’ expectations, and parties may choose to be bound by a particular state law, even if the FAA would otherwise displace that state law. The dissent argued that, even after Concepcion, one could properly refer to the California Consumers Legal Remedies Act’s class-waiver proscription as “California law.” The dispositive question in this case was whether the parties intended the “law of your state” provision to mean state law as preempted by federal law, or home state law as framed by the California Legislature, without considering the preemptive effect of federal law. While the majority found the first reading proper, the dissent argued the California court’s reading was correct. DIRECTV could have included a clause directly conditioning enforceability of the arbitration agreement on the exclusion of class arbitration, but chose not to. “Allowing DIRECTV to reap the benefit of an ambiguity it could have avoided would ignore not just the hugely unequal bargaining power of the parties, but also their reasonable expectations at the time the contract was formed.”

Thomas dissent. Justice Clarence Thomas dissented from the majority opinion based on his belief that the FAA does not apply to proceedings in state courts.

The case is No. 14–462.

Attorneys: Christopher Landau (Kirkland & Ellis LLP) for DIRECTV, Inc. Thomas C. Goldstein (Goldstein & Russell, P.C.) for Amy Imburgia.

Companies: DIRECTV, Inc.

MainStory: TopStory Advertising StateUnfairTradePractices

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