LEGAL
Last month, the Supreme Court ruled in DIRECTV, Inc. v. Imburgia, an interesting follow-up to its landmark 2011 AT&T Mobility LLC v. Concepcion ruling.
The facts of the case begin with a service agreement entered into between DIRECTV, Inc. and its customers, including the respondents in the case. A specific section of that agreement provides that “any Claim either of us asserts will be resolved only by binding arbitration.” Thereafter, the agreement includes a class arbitration waiver, which states that “[n]either you nor we shall be entitled to join or consolidate claims in arbitration.” However, the agreement further states that if the “law of your state” makes the class arbitration waiver unenforceable, then the entire arbitration provision “is unenforceable.”
In 2008, two of DIRECTV’s customers sued the company in California state court, seeking damages for early termination fees allegedly in violation of California law. Eventually, after various other proceedings, DIRECTV moved the court to send the matter to arbitration, citing to the arbitration provision. DIRECTV appealed, and the appeals court affirmed the lower court.
The appeals court specifically held that since the law of California – that is the “law” of the customers’ “state” – makes the contract's class arbitration waiver unenforceable, the entire arbitration provision is unenforceable. According to the court, it was 2005’s California Supreme Court decision Discover Bank v. Superior Court that held such waivers as unenforceable.
Of course, this ruling was made in April of 2014, almost three years after the Supreme Court ruled in Concepcion, which directly abrogated the Discover Bank rule on the unconscionability of class arbitration waivers in consumer contracts by holding that the Federal Arbitration Act preempted Discover Bank’s holding.
The California appeals court did indeed address this issue in its ruling, and did so quite creatively: The appeals court found the phrase “law of your state” to be ambiguous. In the court’s own words, the ambiguity arises because of the following:
If we apply state law alone … to the class action waiver, then the waiver is unenforceable. If we apply federal law, then the class action waiver is enforceable and any state law to the contrary is preempted.
And because the court found this provision to be ambiguous, it should, per common law contract principles, be construed against the drafter – in this case, DIRECTV. Because DIRECTV was seeking to force the matter into arbitration, the court construed the provision in favor of the customers: that the “law of your state” refers to California law alone, and under the law of California, with no consideration given to federal law, the class action waiver is unenforceable.
DIRECTV appealed to the U.S. Supreme Court, which agreed to review the case and reversed the California Court of Appeal in a 6-to-3 ruling on December 14.
The majority opinion, written by Justice Breyer – who, notably, wrote the four-justice dissent in Concepcion – begins its discussion by stressing that “lower courts must follow this Court's holding in Concepcion,” and that while “[l]ower court judges are certainly free to note their disagreement with a decision of this Court, ... the ‘Supremacy Clause forbids state courts to dissociate themselves from federal law.’”
This admonition is likely the result of the majority seeing the decision of the California appeals court as an attempt to circumvent the Concepcion ruling due to that court’s disagreement therewith.
Afterward, the majority moves on to the issues of the case itself, summarily resolving the “ambiguity” found by the California court by stating that “[a]bsent any indication in the contract that this language is meant to refer to invalid state law, it presumably takes its ordinary meaning: valid state law. The remaining bulk of the majority opinion is committed to a discussion about why this holding is correct where the California court was in error.
Although the ruling may seem almost a petty squabble between California state courts and the U.S. Supreme Court, Imburgia nonetheless stands for the notion that federal law – specifically, the Federal Arbitration Act – is supreme and that state courts must abide by these laws regardless of any disagreement they may have with them.
The ruling is of particular importance when many state courts are looking unfavorably on arbitration agreements in consumer contracts, in that it will likely deter many state courts from sending matters before them to arbitration.
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